The Key to Growth is Understanding your P&L Summary – Part 4 Finance

Financial planning, Financial modelling, Corporate finance for small to medium sized businesses

If you’ve read my three previous blogs on how to perform well as a Non-Executive Director, then you’ll have already started to build a good picture of the type of person that’s required for such a role. Exemplary skills in Governance, Strategy and Leadership are all essential attributes none of which can escape the need for a clear understanding of the financial position of the client company.

Having worked with small to medium sized businesses for my entire career, I invariably see the senior management teams focus on the day-to-day needs of the business and its customers. All too often the Profit & Loss (P&L) is something they might have initially looked at once a year when they sit with their accountant to complete the end of year reports for Companies House. The better equipped ones would test this a little more frequently with an increased emphasis coming in the weeks prior to the end of year. Invariably both groups would simply place the signing of the Report & Accounts (R&A) to one side the moment this annual meeting was concluded and simply revert to dealing with the day-to-day challenges on return to the business. This is especially true if the year was a profitable one; but why would you do this when there’s really only three ways of increasing profit. You either sell more (assuming what you’re making is profitable), you cut your costs, or you apply both simultaneously.

It’s here where the P&L has its value because it displays a clear breakdown of your turnover and expenditure which you won’t decipher all that quickly from looking at the various elements stored in your accounting software. The P&L can display advertising costs, office supplies, rent, building maintenance, wages, insurance, telecommunications, travel and utility costs, research and development, depreciation and raw materials. Looking at the picture in its entirety (total costs vs total income) will help establish a starting ratio from where to progress.  From this point forward you’ll need to make adjustments carefully and not before you’ve completed much more stringent analysis. Freezing wages (which was a step I undertook in a previous role) was essential in that situation because the executive board were paying above industry standard salaries compared to their rivals. Unfortunately, they failed to adopt a carrot and stick approach and as a result implied they’d willingly pay more for no increase in productivity, or formalised training. Inevitably they were simply paying more for sub-standard workers who couldn’t ever afford to leave as they’d have needed to take a pay cut! Consequently, they agreed to a tiered approach to salaries that motivated the workforce to increase their capabilities (cross-training on different machines to increase the company’s flexibility during holiday and sickness periods). It worked, many employees stayed, but others who didn’t like the extra challenges resigned and when we recruited new staff, we did so with a new structure that gradually changed the culture. Without looking into the position at the outset as carefully as we did, we may have made the wrong choices.

In another situation, the company’s buyers continued to ignore the advances of new (and better) suppliers over several years because they’d become all too familiar with the historical ones. Staff were frequently attending out of hours events with the supply chain in their private time and this also needed to cease (which it did). Again, it was a people attitude that had been born from within because the board were not only not close enough to the staff but having returned from the annual R&A meeting having made a profit, everything else was taken off the table for another year. But profits are the lifeblood of any business, particularly small ones who have failed to build up a strong cash reserves and instead use the firm as a cash-cow for paying dividends.

As I write this, we’re right in the grip of the international COVID-19 pandemic and writing a blog about Non-Executive Directorships and corporate financial planning seems like it’s not as important as what surrounds us all. But I feel compelled to post this article, just as I have the previous ones, because I know that there are many established businesses that will continue to creak at the seams often without knowing there’s options available to them. Business loans and cash grants are available to firms to help you place your company into a far stronger position from which to create long-term stability, employment and growth and not just through the COVID-19 pandemic either. However, if you’re aspirations are beyond the levels of any current cash injections, don’t let that stop you reaching out to me in my role as an Ambassador of a corporate finance group.

If you’re one of those business owners where this current situation is forcing you to think differently about where you’re at with the firm, but you’re open to seeing the business from a different perspective, I would urge you to take steps as soon as you can to bring a broader experience into your firm to encourage you to maintain that attitude rather than continue to see your business solely from within.

Personally, serving as a Non-Executive Director continues to be an honour and a privilege, so if you’re an executive board member and this article has struck a chord with you, please email me, Nigel Davis to see how I can help you.

  

Nigel Davis was voted ‘One of Britain’s Top 50 Small Business Consultants’, is an MCIM Chartered Marketer, Non-Executive Director and Ambassador within a corporate finance group.

 

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *