What’s going wrong? ACA profile picture

In this week’s Money Matters – Ask the Experts column, from Goldwyns Accountants, based in Southend, Arthur Millman FCA, a director at the company, provides his thoughts on renewing the fortunes of a previously thriving business.

Dear Goldwyns – I have run a successful business for a number of years, but the results for the past few have been disappointing. Where do I look for what is going wrong?

Arthur Millman replies:

Although your accountant may not immediately have the answer, they ought to be pointing out where to look to resolve the issues. Your accountant should not simply prepare the accounts, get you to sign them, tell you the tax payable and give you their bill. The review of the accounts is the opportunity to find out what is going right, what is going wrong and, more importantly, what needs to happen to put it right. That is why prompt preparation of the accounts is important since, if you’re doing something wrong, you don’t want to find out a long time after the year end [when you have continued the same mistakes well into the next year].

The first place to look is at your gross profit margin – is this what you expect and in line with your pricing model, and if not, why? The individual components of your direct costs [normally purchases and labour] may be varying outside what you expect and you need to understand the reasons.

I have a client in the construction industry who had purchase costs which steadily increased: one of the possible causes I outlined was that the warehouse manager may have been free and easy with stock. It was several years before they took notice of what I said, after which the person involved, shall we say,  took a different career path. The same client then had issues with sub-contract labour whose costs were steadily increasing. I suggested that the sub-contractors be paid for what they produced rather than on a ‘day rate’, which dramatically improved costings.

Overheads should be reviewed to understand the reasons for unexpected increases and identify where savings can be achieved. Although businesses differ, the basic principles of pricing, margins and costs remain the same. Your accountant should be there to help you understand the financial aspects of your business and help you identify the ways the business can be improved. If he or she isn’t doing this, you should be seeking an accountant who can. Although important, price should not be the only factor: not identifying problems and taking corrective action could be costing you many thousands of pounds and could even lead to the business failing.

This article was originally published in the Southend Echo on 16 May 2017

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