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Can't Read Management Accounts? You're Not Fit to Run Your Business

Posted On - 28/10/2016 07:59:46

Are you making a profit? Do you always make a profit? Does the profit from some things make up for the losses on others?Good customer data increases what sellers will pay for your business. Dependable income streams bolster that more. The question is: are there things that'll pile on more value? 

Turns out there are.

Previous blogs only looked at what we know about customers and how they spend. They didn't at the business and how it makes profit. That's pretty important stuff. And it's what this post is all about

Stop! Who approacheth the bridge of death...

...must answer me these questions three. And whether or not your quest is the Holy Grail being able to answer them is key. It means you know your business and are in control. What are they? Well, in no particular order: "are you creating wealth?"; "how's your cash-flow?" and, "are you making a profit?".

Together the posts in this series will help you answer the first. The one on cash-flow we'll cover in "Don't be an Idiot Selling Your Business". This leaves the question on profit. We'll deal with that in this post.

Sales minus costs equals profit

It does! But don't fall under the spell of this oh-so-simple sum. Buyers are interested in particular detail and if you can show it, they'll pay more. What is it? Well, think about it like this: while your business may make a profit overall does it always? Or to put it another way, do you make money on everything you sell and do? Do you make more on some products and services than others? And does the profit you make on some things make up for the losses you make on others?

It's not enough to know in your head how your business makes a profit. Buyers don't know your business. You must be able to show them what's going on. You must be able to prove your business is managed, under control and being 'run'. Not merely existing and taking what it's given.

Management accounts

Running your business isn't the same as doing the work. Selling or repairing computers isn't the same as managing your business. And none of these is the same as business administration - paying bills, ordering materials, upkeep, and all that malarkey.

In this post we're interested in "managing". Why? Well, ask yourself this: is a buyer after how well you do admin or your skills and knowledge? They're not - one adds no value and the other they can't buy. What they want is a business that's well managed. Managing anything involves planning what you'll do, doing it, reviewing how you did, and using that to plan what you'll do next. That's where using management accounts come in. Because they give you the precise data you need. They tell you about what's going on with your money.

Got the habit?

In "How to Create a Business Worth Buying" at the 2016 Open Day Luke Rebbettes of BCMS – the experts who talked about business sale – said, "if you're not producing monthly or quarterly management accounts, start now. Get into the habit of keeping good management information."

Could he have made it clearer? From the people who know a thing or two about what makes businesses worth more - or less – the advice is use management accounts. That means taking your profit and loss (P&L), cash-flow statement and balance sheet, and using them to help you run your business. Over the top? Well, it's your choice - you've heard what he said.

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