Beyond compliance: What are your annual financials really telling you?

Joel Gauntlett
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With the first six months of the 2024 year behind us and March 2023 year end compliance work in full swing, it’s always interesting to see common themes jumping out from clients’ financial reports.

While annual compliance can be seen as a chore for many, it still provides important opportunities to discover valuable insights to keep your business safe and help it improve. 

What’s behind your record revenue numbers?

To a large degree this is an inflation story, but we are seeing genuine growth in the mix as well. The key is maintaining and increasing the gains you’ve made. Revisit your goals for what you want your 2024 year-end financials to look like and develop or enhance your plan to get there. For example, what can you do to generate more leads and increase customer retention? From setting up a customer feedback programme to exploring where advertising your brand would be most effective, a little bit more investment in your sales and marketing efforts can make a huge difference.

And, how well do you know your client base, and what are your most successful and profitable product lines? While you’re likely to have a reasonably accurate idea of where your revenue is coming from, investing in tools and software to segment your customer base can open up a whole new world of up-to-the-minute insights about what’s working well and what isn’t. You can then allocate more resource to the most successful products and services. Take the 80/20 rule for example – if 80% of your revenue comes from 20% of your customers or offerings – focus on that instead of everything else. This can also give you time and space to explore new products or services to enhance your customers’ experience.

The margin squeeze: Reduced gross profit percentage

A weaker New Zealand dollar, higher costs of freight and shipping in the earlier part of the 2023 financial year, and higher costs to purchase goods all contribute the squeeze. While businesses have put their prices up, contributing to the growth in revenue, in many cases it has not been by enough, or not soon enough to maintain gross profit margins to the same extent as in 2022.

We typically see a lag in clients putting their prices up, often wearing cost escalation for fear of losing business and market share. Keep a regular eye on your month to month and year to date financial results, along with comparison to prior years. Once or twice a year just isn’t going to cut it in a volatile economic environment. This is where the power of periodic reporting comes in. These monthly reports act as a temperature check for your business by giving you updates about your key performance indicators which typically include:

  • Current ratio of liabilities to assets (working capital)
  • Gross and net profit margins
  • Interest cover
  • Stock turnover
  • Aged debtors and creditor payment times
  • Ratio of wages to sales

It may sound onerous to set up, but it’s an invaluable exercise. Once you have reports automatically rolling over monthly, you can also streamline your annual compliance requirements, save a considerable amount of time trying to find historical information, and get regular up-to-date results that lead to improved decision-making.

Overheads are creeping up

What seems like death by a thousand cuts, with overheads up across the board, a little here and a little there, it absolutely makes a difference, particularly at the wages line. We’ve heard this in the media on a frequent basis and it has absolutely been playing out in clients’ results. 

Watch out for ‘lazy’ costs. It’s easy for excess to creep in when times are good and the cash is flowing. Consider what is necessary to core business and staff morale and retention, and focus on trimming the fat. 

Are you up to speed on technology developments within your industry, and continued emergence of AI? Are there tools or processes you could introduce to materially reduce overheads or improve efficiencies? This could include reducing the impact of travel on your overhead costs by using technology for meetings instead, or simply delaying capital expenditure for a certain period of time. 

Sometimes bigger cuts need to be made – particularly when it comes to wages, but proceed with caution and approach all decisions with a future focus. For example, if you need to reduce your headcount, will this increase again during your next growth phase? There’s always going to be costs for recruiting and training new team members, and if the labour market is tight how will this impact your ability to deliver products and services to customers? 

It all comes down to cashflow

A cliché no doubt, but cashflow is absolutely the lifeblood of your business. There’s lots of levers you can pull to improve your position, including:

Terms of trade with your customers: Can you reduce/re-negotiate payment terms, speeding up your cash conversion rate?

Making customer payments easy: Set up a click through payment function within your invoices and enable payment by credit card. The easier it is to be paid, the sooner you will be paid.

Focus on debtor collection: Stop putting off those tough conversations and start making your accounting software work for you – many products have automated reminders. Take the time to set this up and any other relevant functionality. It will save you time in the long run.

Are you carrying too much stock? Does your stock system alert you to aged stock? And, without shooting yourself in the foot from a margin perspective, what clever ways can you clear excess stock profitably? 

Are you paying your creditors too soon? Make the most of payment terms available to you and consider re-negotiating with suppliers where applicable.

Are you getting the best deal from your suppliers? Go to market and see what’s out there. We’ve seen some incredible cost savings for clients undertaking this activity. 

Consolidate your suppliers: If you’re using a multitude of suppliers, explore options where you can negotiate a better rate by spending more with fewer suppliers, resulting in cost savings overall

Consider debt funding structures: You may be able convert short term bank overdrafts into term debt to spread the load during times of tight cashflow.

Jump on the tax pooling bandwagon: Consider using tax pooling to smooth out or defer provisional tax payments.

And above all, forecast, forecast, forecast! Failing to forecast cashflow and plan ahead can cause even the most profitable businesses to rapidly fail.