WAKE UP CALL SOUNDS FOR SMES
Written on the 25 October 2011
A Gold Coast accounting firm has found 50 per cent of small and medium-sized enterprises are disappointed with the profitability of their business.
The survey by Azure Group highlights that while most SMEs are focused on increasing revenue, many are not considering how to translate it into profits.
Managing partner Steve Smith says a reason for reduced profits is that SMEs are not budgeting effectively. Only 18 per cent have a long-term view to budgeting and 40 per cent do not track actual figures against budgeted figures each month.
“As most SME owners rely on profit distribution for their personal wealth, it is vital the business is profitable for them to earn a living,” says Smith.
“To be effective a budget should be for three years in advance so you have a long-term view of performance. It’s also crucial to be reviewing and comparing your actual results against budgeted figures each month to keep the business on track.
“We also found many SMEs don’t fully know where they stand financially, with one-third not producing a monthly balance sheet or cash flow report and 40 per cent not totally confident their financial figures are accurate.
“This is alarming, as having inaccurate financial information makes it nearly impossible to manage cash flows, tax obligations or understand what areas of the business are profitable and what the profit margins are.”
Smith explains that when market conditions falter many businesses adopt an ‘increase in sales at whatever cost’ mentality. This leads them to heavily discount or operate on a razor thin margin that on the surface may look like things are going well when in reality they are compromising on profitability.
“Recent outlooks suggest that market conditions will remain challenging for some time, so my advice to SMEs is to look at how they can maximise their gross profit and their margins. Often this means focusing on what the business does best and the areas delivering the highest profits back to the business,” he says.
“To do this SMEs must ensure their financial information is up-to-date and accurate, be producing and reviewing their monthly reports, including a profit and loss statement, balance sheet and cash flow report, and have a good understanding of what their gross profits are for their different products.
“In many cases I’ve advised clients to discontinue certain services or products if it’s costing them too much to deliver.”
This is the second annual Azure Group SME benchmarking survey which looked at how small businesses manage reporting, cash, finance, people, tax, budgets, key performance indicators and profitability.
Key SME insights