Traditionally small business owners have their annual accounts prepared 6 to 12 months after the end of the fiscal year, and apart from the accountant spending 15 minutes discussing them and a copy going to the bank, these accounts never see the light of day again.
This is understandable given two factors – a) the accounting figures tell very little that can be acted upon and b) the figures are obsolete by the time they are prepared. However, as business becomes more demanding, small business operators have to become more calculated in their approach to running their business. Long gone are the days of opening the doors, buying and selling, banking yesterday’s takings and then repeating the cycle the following day.
In the 20th century, more than ever before, business development information is required to make the astute business decisions required to guarantee success. Note I use the words business development rather than accounting information … there is a difference. For example, while your annual accounts will show if sales are up or down, they will not show why. It is essential to know what is causing increased or decreased sales because this will dictate your future buying and marketing. Sales are made up of two components, quantity and average sale. Accounting figures do not show these two vital pieces of information, but your business development system should. You can sell a large quantity of items at a low average sale price (eg. supermarket) or you can sell a lower quantity of items at a higher average sale price (eg. jeweler).
In planning increased sales you must plan to increase the quantity of items sold and the average sale, but be careful in your planning - it is easy to increase either figure but at the same time lose profit. You can easily increase the quantity of items sold by promoting product that sells for under $50. For sure you will increase your quantity of sales but I doubt if you will increase your profit. You can easily increase your average sale by stocking only goods that retail above $500 but, once again, I doubt it will increase your profit. You must be fully aware of the impact these two vital figures have on your business.
For example, if sales are down 10%, is it due to less customers buying, or the same amount of customers buying at a lesser average sale? If you can identify the average sale has dropped, you can examine the possible reasons. It will be due to you down buying, a change in sales staff who cannot sell the better end, or your promotion of lower end product. A drop of 10% in average sale can cause a profitable business to lose its profit and a 10 % increase in average sale can double the net profit. If the average sale is up but the quantity is down, it will be due to lack of promotion to bring potential customers through the doors, not having the right stock to meet customers demands, or new salespeople who can't close sales.
In the old days, when business was easier, these things didn’t matter. However, today, to achieve growth, you have to be aware and act upon the quantity of sales and average sales by each product line in your store. This is where business management, as opposed to accounting figures, is essential.