What Profit Do You Really Need To Make? – Ian Browne (Stafford)  A6

By now most people should have their annual accounts ready, even if only in draft format.  Have a look at the outcome and ensure that you understand what they are saying.  How do they compare to last year and are there any unusual aspects that may have influenced the figures?  Are the figures achieving what is required by the business?

Profits have to cover all drawings, taxation and loan commitments the business may have (capital elements of a loan repayment and HP loans) plus any money that is required for reinvestments that will not be placed on HP or a loan.  You also need to make allowances for your future security i.e., retirement or succession.  There may well also be some other things that have to be covered.  This figure is not always obvious when you look at your accounts, but you try to calculate out what has occurred.  This can be done by looking at the profit figure and also what has been happening within the balance sheet e.g., has a loan decreased and if so by how much or have new borrowings been taken on?   This if you are lucky will be shown in your accounts on a page that may be called a “Flow of funds” or a “Profit to balance sheet reconciliation”.  Unfortunately, this is not always published in the accounts so may have to be calculated out by hand.

To answer, “what profit do you really need to make?” you need to be able to answer the questions posed in the last paragraph.  For instance, if the business is a partnership of two families (parents and son and family) and the business has borrowings of say £ 400k and one family aims to retire in ten years’ time and hopes the business will have paid off 75% of the debt.  The answer as to what profit the business needs to make might be:

Once you know this figure you can then assess what the business needs to achieve and budget accordingly.  The reason for enquiring about profit requirement is that if you have no goal how will you ever know whether you are successful or not?  In these times of change it is essential that we are all realistic about what can be achieved from a business.  If the sums do not match up, then you need to understand the consequences of this.  It may mean you cannot afford as much drawings or pension or it may mean that you have to be more realistic about the speed at which you repay loans i.e. negotiate a longer term to repay them.   It is important that this dose of realism occurs now and that ideally you get in and sort out your business while you are in control and Banks are not pressurising you.

What is your business profit requirement?  Contact Ian at ianbrowne@fcgagric.com or your local office to help you review this and keep your business ahead of the game and the Bank Manager!