As the economy emerges from the serious downturn inflicted by COVID-19, where is your business really at? And what conversations and material should you be having and obtaining from your accountant or bookkeeper to assess your business’s true state of affairs?
Consider the following three questions:
1. Do you know financially where you are at right now?
Obtain a Balance Sheet at a current point in time: It tells you what you own and what you owe. Run a Profit and Loss Statement (P&L) for a period of time up until the date of the Balance Sheet. We would suggest it covers the period of maximum COVID impact. For many, this will be from about 1 March 2020. The P&L tells you whether or not you were making a profit during that timeframe. This is the most basic of financial reporting, yet surprisingly many business owners do not regularly access and interpret this data.
2. Do you know where your business would have been, but for the COVID support measures from Governments, landlords, banks etc?
Assess the performance of your business, had it not been the beneficiary of government support and other relief measures. Here is how (note that you may know how to do this yourself, or you may need to get help from your accountant/ bookkeeper or have them do it):
Firstly, run a P&L from the onset of COVID impact. For many business this will be from 1 March to at least the end of October (be prepared to select an altered period as each business will likely have been impacted for differing periods of time and be in receipt of different relief measures).
Secondly, produce a new tailored report building on the P&L in step 1 to “normalise” the result for COVID Impact. You can do this by a simple export into Excel and make your adjustments from there, or you may be able to use accounting (or add-on) software that will allow you to build your own tailored report. A good format would be to show the actual P&L side by side with the normalised P&L, as this will highlight the difference between what the result was and what it could have been but for support measures.
Methodically work through the P&L and remove income items that comprise financial support (e.g. Cashflow Boost, JobKeeper, payroll/land tax relief etc.). Review items of expenditure for those that are artificially low and will return to a “normal” level. For example, subsidised rent, labour temporarily stood down or temporary wage reductions.
Thirdly, analyse the report in 2 as it should give you an indication as to how you will have performed but for relief measures and abnormal expenditure levels. If the adjusted P&L shows a loss or maybe a marginal profit, then this should be a prompt for your business to take action.
It means that unless the business improves its performance, it will be operating at poor or deteriorating levels and there could be a financial iceberg approaching. For these businesses, the logical question to ponder is: “Where do I need to be in order to survive and prosper”?
3. Where do you need to be in order to survive and prosper?
Budgeting and planning is the answer here. Projections of the future will allow you to report two very important outcomes that can serve as critical Key Performance Indicators (KPIs) for your business as it emerges from the period of COVID disruption:
A BREAK-EVEN ANALYSIS:
You need to understand what activity level needs to be met in order to cover costs. The break-even analysis should be expanded to cover any Balance Sheet commitments that may not be an expense, but which must be funded such as debt reduction. It is important to break down the targeted activity to a granular level that you can comprehend and focus on (e.g. sales per day, units sold per day or jobs completed per day etc.).
FAIR RETURN BUDGET:
You need, as a business owner, to understand what activity level needs to be met that incorporates a fair return to yourself as the owner commensurate with your financial investment in the business as well as the business risk you are taking. Again set activity levels at a granular level to assist you to drive achievement of the KPI levels set.