robyn pearson



january, 2003

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One of the benefits that arose from the introduction of GST was an increase in the hands on financial management of the business by small business owners. The need to present trading figures on a quarterly basis, in the form of Business Activity Statements has initiated the maintaining of the accounting records on a regular basis by owners. It is true to say, that prior to July 2000, many businesses only became aware of the trading history of their business when they made their annual visit to the accountant for their tax to be prepared. In many cases this meant that the figures were then over twelve months old and could not be used effectively for management decisions.

Now that we have these quarterly figures in hand, what do they mean?

Jenny Brown, of Brown’s Gourmet Cellar, raised the subject at our monthly meeting recently.

"I heard a comment recently that ‘being able to interpret your financial statements is absolutely crucial to the success of your business’, said Jenny. "There are certainly aspects of our financial statements that we use to guide the Cellar, but why isn’t knowing what you have in the bank a good enough guide?"

"Good point," I replied. "Certainly, the bank balance is a good guide to your cash flow, and we will discuss that in due course. There are other aspects of your balance sheet that require monitoring. To assess your financial statements, we use financial ratios. For example, calculating your gross profit margin will be a direct guide to pricing strategy. Your gross profit margin is the percentage of gross profit achieved from what you have sold. If the ‘norm’ for your particular industry is a 50% gross profit margin, you could use that as a guide for your business. A lower ‘gpm’ will indicate differences in either your sale price, or the cost of your stock purchased."

"Is it a problem if our margin does not match the industry?" asked Jenny. "Surely it is the bottom line profit that we need to be content with."

"That’s true," I said. "There are various reasons why you may choose a different gpm to industry. We need to discuss these."

..........more next month.



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Last modified: 03/04/2014