Running your business to make money: The income statement and the 'small' SME

2009-02-10 00:00

This past couple of weeks I have been looking at particular needs of the small SME - a business turning over under R1 million per annum. Very often, in this size of business, the entrepreneur knows pretty much everything about his or her products or service. Unfortunately though, this extent of knowledge is not always matched in business acumen. Asked for a quote on a new kitchen, rewiring the house or costing a new menu for the restaurant and the answers will be there. Ask for the monthly breakeven amount of the business and he or she will struggle to answer.

Today I want to recommend strongly that all SMEs - however small - should produce monthly income-and-expenditure statements for the business. To operate without this monthly control will dramatically increase the risks associated with operating an SME. Yet experience has shown me that in fact many businesses don't recognise this as a priority.

The situation is akin to having a clock in working order, but it doesn't have any hands. I was looking at an SME only this week and asked the owner if he would let me take a look at his monthly accounts. Back came the answer, "Well, we don't actually produce formal accounts. We keep files for invoices and, obviously, regularly check our bank statements." When I pursued this, he was quick to explain that his was only a small business. He didn't need profit-and-loss reports and all that jazz each month. No control, high risk and lots and lots of stress.

To correct this inadequacy is so easy to do. You don't need to employ your own accountants, clerks and bookkeepers. In every town and city in the Yellow Pages you will find a list of highly qualified and specialised bookkeepers whose business it is to capture your trading data and present this to you in correctly structured monthly income-and-expenditure statements. These companies have many add-on services as well. For instance, they could do your PAYE, VAT returns or reconcile bank statements. The point is that you don't have to carry this overhead from within your own business. You can go to a specialist who will carry out all the necessary data processing for you and give you total control over your business performance. I might add, compared to some of the bought-in services you will need, these accounts are usually priced very reasonably.

Cost of the service will of course vary, but you should expect to pay about one percent of your annual turnover for the production of your monthly income-and-expenditure statement.

Once you have appointed your bookkeeper and established a rapport, control over your business will take on a whole new meaning. You will be able to monitor the business's major operating variables far more factually. By this I mean, you will be able to evaluate turnover, gross margin, overheads, interest paid, your breakeven and of course, profit.

Put this discipline into your business and you will soon find that the couple of hours you spend each month evaluating your business's results are invaluable in terms of clearly understanding its performance.

The best way for me to sum up all I am suggesting for the small SME entrepreneur is found in my definition of the word "control". Control equals knowledge, knowledge of what is happening so that you can put right that which is wrong and capitalise on that which is right.

frankgreenfield@iafrica.com

(Previous articles can be viewed on www.frankgreenfield.com)

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