As business people, we tend to focus primarily on revenue and the bottom line, and take little or no notice of the expenses incurred.
The expenses are where the small leaks can occur.
As Benjamin Franklin quite wisely put it:
Beware of little expenses, a small leak will sink a great ship.
Leakages in businesses does not necessarily refer to pilferages. It could also be due to inflated expenses caused by inefficiencies within the business.
How do business owners or managers, keep an eye out for potential leaks?
Here’s where financial reports are important. Look at these on a monthly basis, not at the end of the financial year or when the auditors presents their draft accounts.
In a previous post, we mentioned the primary financial reports that business owners or managers must look at regularly – Keeping a finger on the pulse of your business.
While the standard Balance Sheet and Profit and Loss accounts are sufficient in most cases, multi-period reports help you zero in on potential leaks.
Taking the Profit and Loss account as an example, the multi-period report allows you to compare your expenses on a month to month basis. You would be able to look at telephone expenses for example, and compare what was incurred for each of the months. While it is a variable expense as opposed to being a fixed charge, the amount should not vary significantly month on month unless your sales increases or your business undertook a marketing campaign or you have started selling overseas, etc.
Of course, to be effective, the accounts need to be properly classified, i.e. the chart of accounts needs to be designed in such a way that information is intuitive. It would be counter productive to lump most of the expenses into an account called “Office expenses”, in which case, you will not be able to identify where the leakage is occurring. All you will know is there is a problem, but will not be able to pinpoint where it is.
Did you know?
With MYOB, you can print
- Multi-period Profit & Loss Accounts which show income and expenses for each month side by side so you can view and analyse trends
- Mutli-period Balance Sheets which allow you to review and analyse assets and liablities on a monthly basis