Shrinkage in the retail sector has a major impact on the profitability of supermarkets and other stores. Shrinkage is the result of theft by customers and staff, and is also caused by damage to goods as a result of poor ordering and handling practices. It can be equal to three per cent of sales at some independent supermarkets. The shrinkage problem tends to be worse in smaller stores with an average shrinkage factor of around five percent. If retailers want to improve profitability they first need to understand shrinkage.

A recent case study revealed a supermarket business turning over 10 million dollars per year while poor shrinkage control contributed to losses of 10 thousand dollars per week off its bottom line. It seems the smaller a supermarket is, the higher the shrinkage problem. As independent supermarkets increase their turnover, the shrinkage problem reduces to an average of around 1.75 percent. Better quality systems, and better management of the factors that drive shrinkage, contribute to the lower figure in larger supermarkets. Best practice operations are achieving shrinkage levels of less that 0.5 percent.

In reality, most supermarket operators do not know the true cost of shrinkage. Often this is the difference between success and failure of the business particularly when profit margins are so tight. An improvement in shrinkage management of just one per cent of sales can improve profitability by thirty-three percent. This type of saving can enable retailers to channel their resources into areas which will make a positive impact upon their cash flow.


Identifying Shrinkage

Shrinkage can be defined as the loss in margin due to poor stock management procedures, reporting practices and internal controls. It is measured by comparing the gross margin from the Point of Sale (POS) Report to the financial accounts or internal stock management reports.

Some of the factors that contribute to shrinkage include theft by customers and staff in the supermarket, inconsistent pricing practices, excessive and uncontrolled discounting, absence or infrequent stock taking, as well as damage to goods as a result of poor handling and ordering practices. For managers and owners, shrinkage is a very attractive area to address as the benefits flow straight to the bottom line. We advocate benchmarking the store to identify the gravity of the issue.

Some of the best practice operators have achieved low shrinkage levels by implementing stock management systems, which are compatible to existing POS systems, allowing for automatic re-ordering, regular rolling stock-takes on high-risk items, and stock management procedures. These systems are supported by staff training and job descriptions and assigning responsibility to selected staff, thus delivering tangible benefits to the supermarket owner.

Just some of these benefits include improved cash flow from reduced stock levels, as a result of ordering of stock consistent with sales demand, reduced theft by making high risk items more visible to staff, and providing an early detection of pilferage through instant stock management reporting.

This type of improvement enables the retailer to then direct their resources into other areas, such as improving their supermarket layout and design. Shrinkage efficient supermarkets are most likely to survive and thrive in a competitive market. To improve profitability allows retailers access to funding for supermarket refurbishments, which is an essential part of competing for market share against national chains.


Shrinkage Reduction Planning

Financial benefits show as soon as a supermarket addresses its shrinkage problem. The best way to begin this process is for the retailer to talk to a professional adviser, or seek advice from industry specialists to develop an action plan to implement better operational practices.

Most retailers are time-poor and work long hours so the most effective way to develop a shrinkage plan is to identify your immediate goals, determine what resources are required (money, people, and time) and allocate tasks to responsible persons. One of the biggest shrinkage issues is that supermarket owners do not compare their management account gross profit (GP) percentage with what comes out from their POS system. This is a big mistake. We found most retailers were unable to produce accurate management accounts on a timely basis and most often conduct stock-takes once a year for tax purposes.

Shrinkage loss really hits home when retailers compare their GP in the financial accounts provided by their Accountant to POS reports. The key is to develop a stock management system that allows for timely and accurate management reporting. Our industry manager recently saw supermarket figures showing a nine percent difference between the POS GP percentage and accounting GP percentage.

For example, regular weekly stock-takes of high wastage and theft items (e.g. meat and fruit/vegetables and tobacco) and cyclic stock-takes on other items will allow for effective monitoring of GP variances.

Adopting a standardised chart of account and journals will improve management reporting of shrinkage as scanning systems ignore the issue. Some supermarket chains have front-end systems that record all customer returns and place the reason for the return and reports at the back office each day and for the week. Further ‘reduced to clear items’ are also all managed via the front end.

Some chains also ensure its cleaners to place floor waste into a separate bin. This separate bin is then checked to see what products the cleaners have swept up and if these products can be reclaimed. It is important that staff take the time to monitor stock, even if it does mean checking the dairy fridge more frequently. You can use technology to keep track of perishables within the supermarket.

“I can’t work any harder and I don’t know how my business is travelling.”

“I don’t feel like I understand my business.”

“I made $300k last year, was it a good year?”

“Numbers give me headaches”.

“My accountant tells me I have to $50k in tax as I made a profit last year. But WHERE IS THE CASH?”

These are some of the most common refrains we hear from clients. These are all heart-felt cries for help for no-nonsense, simple ways to understand their businesses, how it operates, its financial performance and its ability to provide for a lifestyle.


How To Run Your Business More Efficiently

After having worked with numerous businesses from many industries, we found that the following process works the best in helping our clients:

  • Having regular meetings with them to help to spend time working on their business, not just in it;
  • Providing them with easy-to-understand and yet at the same time, sophisticated reporting on the key metrics for the business; and
  • Providing them with a sounding board to make decisions.

The centrepiece in our process is our ability to provide easy-to-understand reports focusing on the key metrics for the business. These provide our clients with the “hard numbers” from which they can come up with options and make decisions.

For example, it is no secret that the hospitality industry has had a tough time lately due to the lockdowns. It is now even more critical for the owners of restaurants and cafes to keep a close eye on their numbers. Here are some of the screenshots from reports prepared for a restaurant client. Accounting and Management reports like these have proven to be extremely helpful in helping the client in making the right decisions to thrive and not just survive in the current downtown.

On Track Kpis V2
Cash Flow Kpis 2
Revenue Analysis 3
Exec Summary 4

Here is another example from a what-if analysis we did for manufacturing client, whose business received a bump in sales as they supplied products which were in high demand due to the lockdowns. In this case, they asked us if they can afford to invest in a particular piece of machinery to keep up with the increased demand, and we were able to answer their question on the spot with an instant profit and cash forecast which our purpose-built software is capable of.

New Machine Data 5

For business owners, running a successful business is often challenging enough, but for many succeeding in business in tough times becomes even harder. What makes the difference between why businesses succeed and fail, particularly in a tough economic environment? Managing through difficult times is an uphill struggle for sure. However, there is good news: there are a few simple measures you can implement to improve the probability that your business will succeed even when the going gets tough.


Why Businesses Succeed And Fail

Often the factors that lead to success in a business come down to some basic but fundamental principles of business management. Implementing these four tips could make the difference between why businesses succeed and fail when the economic environment takes a downward turn.

1. Protect and grow your revenue

Contact your key customers and ask them how their business is faring. Meet regularly with high-value customers and offer your support. Understanding their situation means you will be better informed about what you can do to assist them and thus protect and potentially grow your business’ revenue. To grow your own revenue, invest in new innovative (low cost) sales strategies, increase (low cost) sales and marketing programs and show leadership by spending more time with your customers and sales team.

2. Reduce your costs

A reduction in revenue and/or profit means you will need to examine your cost structure to maintain your profitability. Be prepared to make some hard decisions. Low fixed and high variable cost is the ideal cost structure for doing business in tough times.

Non Trading Costs – try to reduce or eliminate non-trading costs. For example, examine wage productivity reports and restructure non-productive roles or encourage multi-skilling to maximise your employee return per hour. Staff reduction is not necessarily a given in tough times!

Variable Costs – examine all your expenses and investigate ways to transfer your business’s fixed costs to variable costs. Outsourcing is a variable cost strategy.

3. Collect your cash

Collecting cash from your customers may become more difficult. Avoid business cash flow problems and consider amending your policies for debtor collection and stock management.

Debtors Collection: place tighter limits on the amount of credit you extend to your customers. If you have exposure to large customers, seek assurances and guarantees on how they will pay their account. Enter repayment schedules and offer ‘cash only’ terms until your customer accounts are in order. If the decision is between being flexible and survival there is really only one choice.

Stock Management: don’t over-invest in stock. Place strict controls over stock ordering and management. If customer sales slow down so should your ordering.

4. Minimise your risks

When looking at why businesses succeed and fail in difficult times, it is important you move quickly to minimise your business risk. The first step is to re-examine or develop a new Business Strategy or Plan to review and assess your current situation and plan the future. When preparing your Business Strategic Plan seek guidance from your accountant who is best positioned to provide this advice. Seeking advice early will mean the difference between your business thriving or simply surviving.

The team at MGI South Queensland have helped many businesses not only survive but thrive through difficult times. We have business coaches as well as experts in tax and risk management. Our outsourced CFO and financial management service gives you access to specialist support who can help you improve your financial procedures and improve your bottom line. Give us a call on 07 3002 4800 or book a consultation online today.

Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Readers of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. MGI accepts no responsibility for any loss suffered as a result of any party using or relying on this article.

“Would you tell me, please, which way I ought to go from here?”

Did you ever ask yourself this question during any stage of your practice career? Long gone are the days of starting a business out on a limb and hoping for the best, with the release of Royal Australian College of General Practitioners (RACGP) 5th Edition, a business plan is listed as one of the new standards required.

Indicators in the RACGP Standards 5th edition provides the following guidance on business planning:

Criterion C3.1A – Our practice plans and sets goals aimed at improving our services.

You must:

  • plan and set business goals.

You could:

  • write a statement of the practice’s ethics and values
  • maintain a business strategy
  • maintain an action plan.

Criterion C3.1B – Our practice evaluates its progress towards achieving its goals.

You could:

  • maintain progress reports about the business strategy or action plan
  • create a strategy for continuous quality improvement
  • implement quality improvement initiatives

Whether you are just starting out in a new practice or other stages of the practice life cycle, establishing a business plan is not merely for meeting the new RACGP Standards 5th edition requirement but is critical to achieve your business goals.

Whilst the initial phase of developing a business plan can be overwhelming, a well-developed business plan will set the roadmap of the business progression and guide/support the operational success of a practice.

We have listed some top tips for you to consider before you embark on the journey of developing a business plan.

  1. Determine who the plan is for
    Target a business plan specific to your practice and the unique offerings you can bring to the community
  2. Conduct relevant research
    Understand your current status quo (structure, marketing, finances strategies) and identify the opportunities that are available. By having accurate and up to date information, you will be more confident with your forecasts and analysis.
  3. Be practical with your process
    Identify the areas your business plans will address and do not attempt to complete your business plan from start to finish.  Good planning takes time and effort to ensure you are mapping out the best road to success possible. Break down the components of the business plan and tackle the areas that are more relevant for your practice first and set aside the areas that don’t have immediate impact.  You can always jump back to the other sections later.
  4. Get guidance
    If you aren’t confident in completing the plan on your own, you can enlist the help of a professional to review your plan and provide you with the relevant advice and direction.
  5. Review
    As with any document, a business plan will evolve over time with the changes in your practice circumstances or the industry.  You should conduct a regular review to ensure your business plan is on track with the vision of your practice.

With extensive experience in helping medical and dental practices to thrive, the team at MGI South Queensland can help you with your existing plan or the development of a business plan to concrete your roadmap to success.

Did you know there’s free money out there that can help your business to grow?

Yes there is really free money out there and no, this is not click bait. There are a number of Government grants for small business at both Federal and State levels intended to help businesses to improve and grow.

For example, we have recently assisted a number of clients to obtain grants under the Entrepreneurs’ Program such as the Business Growth grants to assist them with business needs as varied as:

  • strategic planning
  • employee share scheme design and implementation
  • advisory board
  • financial performance management
  • exit planning and much more.

This programme aims to drive business growth for businesses in the five growth sectors, which are:

If you are not sure if you qualify for one of the Government grants for small business in one of these sectors, by all means have a chat with us. These categories are broader than you think!


How you can use Government grants for small business

If you are in one of these sectors, there may be Government business grants available under this program to help your business to:

  • commercialise novel products, processes and services (Accelerating Commercialisation Grant);
  • access expert support to identify growth opportunities, improve management skills and business systems, increase market share and improve the financial performance of the business (Business Management Grant);
  • assist start-ups to develop the capabilities required to achieve commercial success in international markets (Incubator Support Grant); and
  • access expert guidance to address knowledge or research related issues (Innovation Connections Grant).

Each of the above are dollar for dollar matching grants of between $20,000 and $50,000, meaning a $40,000 project may only cost you $20,000. It’s crazy to say no, when the government offers to pay half of your costs. And this is just one of a number of grant programs available at the federal level.

At a state level, there are also Government business grants available. For example, the Queensland government’s Business Growth Grant is designed to support fast growing businesses looking to put on staff, purchase specialised equipment and access services to support business growth. Grant applications may attract funding of up to $50,000 depending on the application. Successful applicants may only have to contribute 25% – 50% of total project costs.

Here’s a flowchart we use to help our clients assess whether they are eligible for some of the most common grants we see.

Grant Flow Chart

We outlined a number of the available small business grants in a little more detail in an earlier blog post so take a read and to find out more.

For further details about the Government business grants mentioned or if you would like to know whether you are eligible, please contact the expert team at MGI South Queensland on 07 3002 4800.

This article aims to provide you with an overview of the grants that may be available to you. It is not intended to be specific advice for your business.

Despite a reputation for being some of the best paid professions in Australia, there is no guarantee that medical and dental practices will make money. In fact, one survey showed that 20% of medical practices make losses.1 Having worked with many medical and dental practices, both general and specialist, here are 10 ways we think practice owners can improve their profitability.

Practice

  1. Do you have to do it?

    Leverage is the name of the game. The effective use of nurses and administration staff is a key area where practices should look to improve their profitability. This is also an area where there is a great deal of difference between practices. For general medical practices, we think clients should aim for one administrative staff (other than the practice manager) per 2 GPs and 1 nurse between 4 to 5 GPs.2 On average, non-GP staff cost is 23% of gross patients, but the top 20% manage to operate on just under 15%. For dental practices, the average is 30% (this includes dental assistants and hygienists) but some manage under 20%!

  2. Are they coming back?

    One of the biggest challenges for the doctors and dentists we work with is getting patients to come back. Many practices have invested time and money in setting up systems to remind patients to come back for a check-up. For us accountants, there’s Big Brother (the tax office) with a stick that “reminds” everyone when it’s tax season. Getting high reappointment rate at your practice, however, requires a lot more work than an automated reminder. The benefits are significant though. Analysis of dental practices show the biggest difference between practices that make $500k in patient fees and those than make $1m is reappointments for regular check-ups. And we all know it is a lot more expensive to get a new patient to pay you a visit than an existing one.

    The key to getting patients to come back is to have you, the practitioner, explain to your patient why it’s important to come back for a check-up. I know, I know, the pressure to move onto the next appointment can sometimes be immense. But hear me out. Your patients are there because they trust you with what they value the most, their own bodies. So you are by far the best placed person to explain to them the importance of regular check-ups. Only when you take the time to explain, will they perceive enough value in the regular check-up to warrant them to come back. So by all means investing in automated reminders, but also take time to explain to your patients the benefits of regular check-ups (e.g. overall health benefits, avoiding emergency appointments, early detection of issues, I’m sure you know them way better than I do).

  3. Would you like fries with that?

    This iconic phrase of McDonald’s has now become synonymous with up-selling. Whilst many of us may be reluctant, being able to up-sell is an essential skill for any business owner. There are many businesses that depend on the up-sell to make a buck. You know the ones I’m talking about: a free book that leads to an offer about another (a cheap book). You are then offered a (slightly more expensive) course, which leads to a seminar which up-sells to a $20k “mastermind” workshop.

    Applying a similar strategy for our dentist friends, you could offer say, a free tooth clean in your marketing. Remember the most expensive sale is the first sale. It is worth investing some time to get them in the door. Once they are in, you know what to do: depending on what they need, subtly offer them whitening, filling, cosmetics, crown etc. Work your way up the value chain for your practice. And don’t forget the previous point, make sure they come back and measure your reappointment rate.

  4. Beware of benchmarking!

    This might rile some of my fellow accountants up a little. If your accountant is worth their salt they would have sent you some industry benchmarks for your practice. And we are all for benchmarking (call us if you’d like to benchmark your practice against your peers). It is an easy way to access where you are compared to your peers. The idea is that you can get the most bang for buck for your efforts in the areas with large dollar impact and where you are most behind.

    Be warned, there is a trap with benchmarking: you need someone experienced with the numbers to figure out what the numbers are saying that you should do.

    Back to medical practices. To give an example, according to a recent survey, the industry average of gross patient fees for a GP is approximately $400k. The top 20% generated over $590k per annum. The same survey says 60% of those fees are bulk-billed. But the top 20% bulk bill 91% of the fees. On the surface, increasing bulk-billing percentage might seem like a valid strategy. However, there’s actually no definitive link between bulking billing and the profitability of the practice. As the saying goes, Sales is Vanity, Profit is Sanity and Cash is Reality. If it doesn’t turn into profit and cash in your pocket, all you are doing is stressing yourself out with increased activity. Don’t get me wrong, I’m not saying increasing your bulk-billing percentage is never a good idea. This will depend on a number of factors, not least the demographics of surrounding suburbs. What I’m saying is that it is worth bearing in mind that often practices that only or mostly bulk bill will have lower profit margins than private practices. As a result, there’s often a lot more pressure put on the doctors of bulk billing practices to have shorter appointments, something not necessarily the best for patient care. But it may be necessary for practice survival.

    A better metric to measure, in our opinion, is how well the consulting rooms are utilised. One study found the average consulting room usage is 49.3%. This means half the time the practice is open, nothing’s happening in those rooms! The best practices manage 75.1% on average.

    Beware of benchmarks and make sure your accountant understands the drivers of profitability in your practice.

Financials

  1. Focus on the North Star Metric

    If you’ve ever been to a business awards night, you’ll hear stories of astronomical growth and heroic tales of overcoming obstacles to conquer the world. If you ever read the financial press, you’ll read about the insane profits the big banks make. Amidst the glamour, glitz, shock and awe, rarely will you hear the rational (accountant) voice that everyone’s forgetting what matters the most – return on investment. It is not cheap to start and run a practice (something our dentist friends understand the most I suspect). How do you know if you’ve made enough money to compensate the time and effort as well as the risks you’ve taken? Our answer, measure, measure and always measure your return on investment. More specifically, measure Return on Capital Employed which is the most important measure of financial performance for any business. Not just for the business, the same principle applies to every marketing campaign and buying new practice equipment.

  2. How much does the alternative cost me?

    Running a business is about making decisions, big and small, day in and day out. One of the questions asked when making decisions is: how much is it going to cost me? What is often not asked, though, is: what does the alternative cost? It is worth comparing the costs and benefits of alternatives.

    For example, some practitioners prefer to hire casual staff rather than permanent staff. It is rare though, for the practitioner to how work out the costs of benefits of employing casual versus permanent staff. The comparison it not straight-forward. A permanent staff member is entitled to leave (annual, personal and long service) whilst a casual staff isn’t. But a casual staff member gets an uplift in pay (typically 25% under most of the relevant awards) to compensate for this. Whilst this depends on the practice and the roles filled by those staff, it is often the case that the practice may save money by replacing casual staff by permanent staff. This might come as a surprise to some and it is worth thinking about how you’ve structured staffing.

  3. I didn’t make any money so why do I need to pay tax? Watch the cash.

    When we present financial statements to clients, it is not unusual to see clients say that whilst they understand they’ve made a profit, it doesn’t feel like it and no one wants to pay tax when they don’t have the cash.

    Cash flow management is often an overlooked area in business. For our practice clients, we see this issue most often with our orthodontist clients, although it is an area that needs monitoring by all. DentiCare is great in getting patients over the line to getting treatment, but spreading receipt for patient fees over two to three years will put strain on your cash flow. It is therefore important to befriend your bank manager and your accountant (yes accountants need friends too) to:

    1. Monitor and forecast when you might need help with cash flow
    2. Warn your bank manager so they are not taken by surprise.

    Early detection and warning is crucial. After all, there is only one reason why businesses go broke – running out of cash.

Strategy

  1. Don’t forget your most valuable asset

    Being some of the best paid professions in Australia, the vast majority of medical/dental practices are profitable.You’re no doubt inundated with requests to invest your hard-earned money in all sorts of investments: bonds, TDs, shares, property, precious metals, Bitcoins etc. etc.

    You may or may not have thought about what your most valuable asset (other than your home) – your practice, is worth. Especially given the recent trend in consolidators buying practices, this is becoming something at the forefront of more practitioners’ mind.

    Practice valuation is not a simple exercise but it doesn’t have to cost an arm and a leg either. If you want to know how much your practice is worth, download our business valuation guide or come and talk to us. If you aren’t happy with the current value of your practice, a good place to start is to re-read this piece and start implementing some changes. By all means come and talk to us if you want help.

  2. Get advice

    Doctors and dentists are some of the busiest people. Pressure of back-to-back appointments often makes it difficult for you to take time out to seek advice from other professionals who can help you. In order to grow your wealth, getting the structuring of investments right can protect your assets as well as potentially saving you hundreds of thousands in tax. Working on your business is just as important as working in your business. So when your professional advisors want to meet for a meeting, say yes! A good professional will be accommodating of your schedule.

    Read the story of how we’ve helped an orthodontist throughout his entrepreneurial journey.

  3. What is your end game? Visions of the not-too-distant future.

    What does your life look like in 5, 10 or 20 years’ time? Where will you live? What will you do? What does family life look like? What does your social life look like? What will give your life meaning?

    “Begin with the end in mind”, says Stephen Covey in his brilliant book, ‘Seven habits of highly effective people. When you are in the midst of things, it’s easy to miss the forest for the trees. Be sure to take some time out to plan what your future will look like. You’ll find this will inform what you should be doing now and what changes you might want to make to get there.

MGI South Queensland have helped many medical and dental practices increase their profitability and manage their businesses more efficiently. If you would like to talk to one of our senior accounting team in Brisbane or on the Gold Coast about how we can help grow your medical or dental practice profitability, give us a call on 07 3002 4800 today or fill in your details below and one of the team will be in touch.

Footnotes:
1. As compared to if that practitioner was in a job rather than owning a business.
2. All full time equivalents.

Poor performing products or services can be a serious detriment to your business, diverting valuable resources and finances from more successful ventures and pulling down the overall profitability of your entire business. So knowing when to pull the plug on a poor performing product or service is important.

Some signs which may indicate that a product is a dog and should be considered for divesting include:

  • Low profitability
  • Declining sales/market share
  • Costly to maintain
  • At risk of disruption/technical elimination
  • Doesn’t align with the vision/purpose of your organisation.

Our recent article Product lines…how much profit is enough? provides more guidance of how to assess whether a product is a dog, cash cow, star or wild cat.

Once you have identified a product as a dog it’s time to take action…but what exactly does that look like? Here are three common strategies for divesting a product.


Option one: could you harvest your product?

If you have a product that has lower profitability and slowly declining market share, but is still generating a positive cash flow it could be appealing to look at harvesting the product rather than eliminating it completely. Harvesting involves gradually phasing out a product by taking action to reduce production costs or increase the unit price without increasing costs. The benefit of this strategy is that you get to enjoy the profits from the product line for longer but you are starting to divert resources and attention to more profitable business opportunities. Once the product you are harvesting starts to generate negative cash flows, you need to divest it completely.


Option two: can you simplify a product line?

Sometimes product lines become less profitable because they are too complicated. For example, a company may have a number of product variations which require limited production runs, additional inventory and a larger marketing budget. To combat this it may be possible to simplify the product line by reducing the number of variations with a view to “standardising” the product and thus reducing associated production costs. The challenge however is maintaining your market share with reduced product options.


Option three: total line divestment

If there isn’t an opportunity to harvest or simplify your product lines you have one further option left – total line divestment. This means completing getting rid of a product that is not performing well. This can have a large knock on affect for a business as it may result in staff changes, negative sales growth and the perception of failure. However at the end of the day it’s a hard decision that may need to be made to protect other more successful product lines in your business.

Total line divestment can also mean selling the part of your business that manufactures that particular product. If you are in a high growth market or if you have a profitable product, but that no longer aligns with your company vision or is facing future technical disruption/elimination, this may be an option to consider.

Knowing which divestment strategy is right for your business is dependent on having a sound understanding of the financial performance of your product portfolio and the market attractiveness. If you are not confident about this, the starting point is to undertake a detailed product portfolio analysis with an experienced accountant/business consultant.

Many business owners think you need to increase sales to make more money. But often this is the more difficult path. A minimal increase to your profit margin can have a much more profound effect. Watch our video How to improve your business profitability to explore why this is the case and what you should consider in improving the profitability of your business.

There are two types of accounting methods accrual and cash accounting. Which type your company uses can have a major impact on the total revenue and expenses that appear in your financial reports.

Typically cash-basis accounting is used by smaller businesses who prioritise simplicity. Using cash-basis accounting a company records expenses and income as the cash is actually paid out and received.

There are some advantages to using cash-basis accounting such as:

  • It’s easier to keep a track of your cash flow
  • It’s suited to smaller businesses that mostly handle transactions in cash

The major disadvantage is that it doesn’t capture money owned to you or that you owe to others so it can be difficult to get an accurate picture of how the business is performing financially. Take a business we met recently which delivered training funded by various different governments and received lump payments on a few occasions a year. Using cash-basis accounting it was extremely difficult to track the health of their business because they either had ample cash or had been incurring expenses but were yet to receive payment.

Accrual accounting, whilst a little more complicated, is much better suited to businesses larger than microbusinesses or businesses who don’t get paid straight away.

Using accrual accounting you record expenses and sales when they take place as opposed to when cash is paid or received. For example using Accrual accounting our training business would apportion lump payments throughout the year depending on when the actual training was carried out. Now income and expenses are matched and the business has a true picture of their financial position.

A word of warning though, if you are using accrual accounting you need to keep an eye on your cash flow because any issues won’t necessarily appear in your financial statements.


How to introduce accrual accounting?

If you are already using an account or bookkeeper you simply need to ask them to start providing you with accrual accounting financial statements. Speak to an MGI advisor to make this happen.

One of the most common questions we get asked is “Am I making enough money” or to put it another way “How much profit should I be making”. This video shares a simple but powerful process to assess the financial performance of your business. So what is the financial performance of your business? Financial performance is a general measure of a company’s financial health over a period of time and can be used as a benchmark to compare your firm with other similar firms in your industry as well as to compare different industries.  Three different financial reports are used to measure your financial performance and these include the balance sheet, the profit and loss statement and the cashflow statement.

Balance Sheet

I liken the balance sheet to a photograph – it’s a snapshot of your business and  typically measures your firm’s assets and liabilities and how well these are being managed.

Profit and Loss Statement

The profit and loss statement is more like a video as it tells a story over a longer period of time, typically one financial year.  It provides a summary of operations and measures sales against expenses with net income being the net result.

Cash Flow Statement

The cash flow statement is a combination of both the profit and loss statement and the balance sheet and provides the source and uses of cash flow from operations, investing and financing. Measuring the right financial metrics is essential for your business because they can provide important insights into how well your business is doing in comparison to other business as well as allow you to make informed decisions to maximise your growth into the future. If you want to keep your business on track, you simply cannot ignore the process of developing financial metrics for monitoring your progress.
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