How to Understand Your Business Finances and See the Bigger Picture
Understanding your business finances means looking beyond the balance in your bank account or the profit shown in your annual accounts. To make informed decisions, you need a clear view of how the business is performing, where profit is being generated, what is happening to cash and what the numbers could mean for the months ahead.
For growing businesses, this becomes increasingly important. Decisions about recruitment, pricing, investment, expansion and funding all have financial consequences.
At Butt Miller, we believe business owners should be able to see the bigger financial picture. That means having accurate financial information, understanding what it is telling you and using it to make better decisions.
Why annual accounts don’t tell you everything
Annual accounts are essential. They provide a record of your company’s financial performance and form an important part of your statutory accounting compliance.
However, annual accounts largely tell you what has already happened.
For a business owner making decisions throughout the year, that information may not be enough.
Imagine discovering several months after your year end that margins have gradually fallen, debtor days have increased or one part of the business is significantly less profitable than another.
The information may be correct, but it has arrived too late to influence the decisions that created the result.
Growing businesses increasingly need access to timely financial information throughout the year, alongside their statutory accounts.
What financial information should a business owner monitor?
The right measures will vary depending on your business model, sector and objectives. A construction company, for example, may need to monitor work in progress and project margins, while a consultancy might focus more heavily on utilisation, recurring revenue and profitability by client.
However, most business owners should have a good understanding of:
- Revenue – how much the business is generating and whether this is increasing or decreasing.
- Gross profit and margin – how profitable your products or services are before overheads.
- Net profit – what remains after the wider costs of running the business.
- Cash flow – how cash is moving into and out of the business.
- Working capital – whether the company has sufficient short-term resources to meet its obligations.
- Debtors and creditor days – how quickly customers are paying you and how supplier payments are being managed.
- Budget against actual performance – whether results are matching what you expected.
- Key performance indicators (KPIs) – the financial and operational measures that matter most to your particular business.
Looking at individual numbers can be useful. Looking at them together is where you begin to understand what is really happening.
Profit and cash flow are not the same thing
A profitable business can still experience cash flow problems.
For example, your company might have increased sales significantly, but if customers are taking 60 or 90 days to pay while wages, suppliers and other costs need to be paid sooner, growth can put considerable pressure on cash.
The opposite can also happen. A healthy bank balance at a particular point in time does not necessarily mean the underlying business is performing profitably.
This is why decisions should rarely be based on one figure in isolation.
Regular cash flow monitoring combined with profit and loss information, balance sheet data and forward-looking forecasts provides a much clearer view.
Look beyond turnover when measuring business performance
Revenue growth is often celebrated, but increasing turnover does not automatically mean you have built a stronger business.
Suppose turnover increases by 20%, but additional employees, supplier costs and overheads reduce margins substantially. The business may be larger, but it may not be more profitable.
Questions worth asking include:
How much profit are we making from each service, product or customer?
Are our margins improving or declining?
Are overheads increasing faster than revenue?
Are we pricing our services correctly?
Is growth generating additional cash or absorbing it?
Are some areas of the business effectively subsidising others?
These are the types of questions that turn accounting information into useful commercial insight.
Use management accounts to understand what is happening now
Regular management accounts can provide a much more current picture of your financial performance.
Unlike statutory accounts, management accounts are produced specifically for the people running the business. They can therefore focus on the information that matters most to your company.
Typically produced monthly or quarterly, they might include profit and loss, balance sheet information, cash flow analysis, KPIs, budget variances and commentary on significant changes.
The real value, however, isn’t simply having another financial report.
It is understanding why the figures have changed.
If gross margin has fallen, what caused it?
If cash is tighter despite increasing sales, where is the money being absorbed?
If one division is outperforming another, what can you learn from it?
Good management information should help you identify these changes earlier and decide what action to take.
Compare actual performance with your plans
One of the simplest ways to gain greater financial control is to compare what actually happened with what you expected to happen.
If you planned to generate £150,000 of revenue during a quarter but achieved £125,000, the difference needs investigating.
Likewise, exceeding your revenue target isn’t necessarily positive if achieving it required significantly more expenditure than expected.
Variance analysis can reveal where assumptions were wrong and help management adjust before a small issue becomes a larger problem.
It also makes future planning more useful because each forecasting cycle is informed by what you have learned from previous performance.
Butt Miller’s financial forecasting services combine historic financial information with assumptions about revenue, costs, cash flow and future plans to provide a clearer view of what may lie ahead.
Turn financial information into better business decisions
Financial reports are most valuable when they influence what happens next.
For example, better financial information can help you decide whether the business can afford to recruit another employee, increase marketing expenditure, invest in new equipment, move premises or enter a new market.
It can help you understand whether prices need reviewing, which customers or services contribute the greatest value and whether an expansion opportunity is financially realistic.
For larger decisions, you can also model different scenarios before committing money.
What happens if sales are 10% below forecast?
What if an additional employee is recruited six months earlier?
What happens to cash if a major customer takes longer to pay?
What level of additional revenue would be required for an investment to make commercial sense?
The aim is not to predict the future perfectly. It is to understand the possible financial consequences before making a significant decision.
Step back from the day-to-day running of the business
Business owners naturally spend much of their time dealing with what is immediately in front of them: customers, employees, suppliers, sales and operational issues.
That can make it difficult to step back and consider the wider direction of the company.
Regular financial reviews create an opportunity to do exactly that.
Are you moving closer to your long-term objectives?
Is the company becoming more profitable?
Does the business have sufficient cash and resources to support the next stage of growth?
Are there emerging risks that need attention?
Could capital be used more effectively elsewhere?
This is where financial management begins to overlap with wider business advisory services. Rather than looking at accounts purely from a reporting perspective, your financial information becomes part of decisions around growth, investment, pricing, structure and long-term strategy.
Financial forecasting helps you look ahead
Historic financial information is valuable, but business owners also need to understand what could happen next.
A financial forecast uses existing performance and reasonable assumptions to model future revenue, costs, profit, cash flow and financial position.
This can be particularly valuable when you are considering a major change.
You might be planning to recruit several employees, open another location, acquire a competitor, introduce a new service or make a significant capital investment.
Before committing, a forecast can help establish whether the plan is affordable and what impact it could have on cash and profitability.
Forecasting should also be revisited regularly. Businesses change, market conditions change and assumptions that were sensible six months ago may no longer reflect reality.
Connect your finances with your wider business strategy
There should be a clear relationship between your numbers and what you want the company to achieve.
If your objective is to grow, your financial plan needs to establish how that growth will be funded and what level of return you expect.
If you’re preparing for an eventual sale, your priorities may include sustainable profitability, recurring revenue, strong financial controls and reliable reporting.
If you want to reduce your involvement in day-to-day operations, you may need stronger management information and greater financial accountability across the leadership team.
Our strategic planning services help business owners step away from immediate operational pressures, establish where they want the company to go and create a framework for getting there.
When does a business need more senior financial support?
As a business grows, there often comes a point where producing accurate accounts is no longer enough.
The owner or management team may need somebody who can interpret the figures, challenge assumptions and provide a senior financial perspective on important decisions.
This does not necessarily mean employing a full-time Finance Director.
An outsourced Finance Director can provide senior financial input on a flexible basis. This can include reviewing management information, improving forecasting, assessing cash flow, supporting board meetings and helping the management team understand the financial implications of significant decisions.
It can be particularly useful when a company is growing quickly, experiencing more financial complexity or preparing for investment, acquisition, restructuring or eventual exit.
See the bigger financial picture
Understanding your business finances isn’t about producing more spreadsheets or tracking every number available.
It is about identifying the financial information that matters, reviewing it regularly and understanding what it means for the decisions you need to make.
Accurate accounts provide the foundation. Management information helps you understand current performance. Forecasting shows what could happen next. Strategic advice helps you decide what to do with that information.
Together, they provide a much clearer picture of the financial health and direction of your business.
At Butt Miller, we work with business owners and management teams to combine reliable accounting with management information, forecasting and commercial advice. Our aim is to help you understand the numbers, consider the implications and make better-informed decisions about what happens next.
If you would like a clearer view of your company’s financial performance and future plans, contact the Butt Miller team to speak with one of our experienced advisers.
