The checklist that follows this introduction is relevant for any business structure: sole trader, partnership, or limited company. Where there are ideas listed that are only applicable to one of these three, this will be highlighted in the text.
The aim of this area of business year-end planning is to consider factors that you have some measure of control, and that will enable you to either reduce or increase your published profits for the year under review.
This may seem to be counter intuitive. How can you affect levels of profitability? Isn’t this determined by market conditions?
We shall see…
However adept you are at keeping your accounts, it is likely there are inaccuracies in your numbers that will have an impact on the amount of profit or loss you believe you have achieved. We are not suggesting that you artificially adjust your figures, far from it. The prime aim of pre-year-end planning is to seek out your true financial position and then consider what can be done to improve your position BEFORE the end of your trading period. If you wait until after your year-end, remedial action may no longer be possible.
The benefits of profit planning prior to your trading year-end can be summarized as follows:
- An opportunity to arrive at a realistic estimate of profits for the current financial year.
- A chance to make decisions based on this estimate that will benefit your longer-term goals.
- Time to consider the effects of the current year’s performance on your business investors, your bank, and your staff.
- It also flags up the ability of your business to sustain your current and future remuneration and withdrawals from your business.
- And finally, all UK businesses will be challenged by the current, dire state of the UK and world economies. In the UK we are facing high inflation, rising interest rates, continuing supply issues – as well as extreme increases in energy costs. Assessing and planning your business profitability will be key to surviving these challenges.
Another word for planning is forethought. If you do not plan your business future, you are apt to end up considering the reasons why things have not worked out as you expected – you will stare at the open stable door, and the empty stall, and wonder why you never repaired the lock.
Business Profit Review Checklist
Accounts:
- Make sure you have depreciated your fixed assets, equipment, and vehicles, at a realistic rate. You don’t want the written-down value of your assets to exceed their market value.
- Write off any bad debts.
- Write off any slow-moving or obsolete stock. Consider an on-site auction or similar sale.
- Make sure that you have not capitalised any replacement equipment that should have been written as repairs or written off equipment purchases that should have been capitalised.
- Take a good look at your cut-off procedures. Are all your supplier invoices received and posted? Have you invoiced customers for work you have not delivered yet?
Projections to the end of your
trading year:
- Base your sales projections on known factors. For example, orders received, consistent with past or repeat sales and considering current economic challenges.
- Base your cost projections on current fixed costs, rents, wages and salary costs, and additional costs that you feel need to be included. Be realistic.
- Factor in expenditure on capital equipment that you feel must be acquired to maintain sales or production at the required levels.
- Make sure that apart from creating profit and loss and balance sheet forecasts, you also prepare a detailed cash flow forecast.
Consider the results:
Do the results:
- Show an overall improvement or worsening of your financial position.
- Reveal a healthy cash flow.
- Point to deteriorating market conditions, falling demand for your products or services. How will this affect your planning for the immediate future and your longer-term goals?
- If you consider the demand for your services will rise, are you in danger of over-trading?
- How will your business investors, or your bankers, react to the projected results?
- Is your business providing you with an adequate return for your capital invested in the business and are you properly remunerated for the time you spend in
the business?
If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.
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