Background

The owners of a small design company had been managing their business purely from a cash flow perspective. The day to day business decisions were based on cash levels rather than with an understanding of the underlying business profits and margins.

The client only knew the profit of the business several months after the financial year end. This is of course far too late for the business owners to make informed commercial decisions.

By not having the involvement of an experienced accountant they found themselves under extreme stress as they did not fully understand the dynamics of work volumes, charge out rates, work in progress and project profitability.

Their confusion was why, if they worked round the clock and charged clients a fee, their cash balance was always under severe pressure.

Solution

Once Haxton became involved it quickly became clear that they were over-delivering to customers at a price that yielded minimal profit. They had of course very happy clients.

Knowing this approach was inadequate the client asked Haxton to help them understand the profitability of their design services. They needed help with making good business decisions by using regular monthly management accounts and historical trends for revenue, costs and profit.

Understanding costs is particularly important for new, expanding, diversifying or struggling businesses as it is vital to understand the level of fees required each month to cover monthly costs and personal income requirements.

This was a perfect partnership for Haxton and the client. The client continued to do the bookkeeping while Haxton translated the cash transactions into a monthly detailed profit and loss statement.

Result

The monthly financial reports enabled the client to readily understand how their business was performing – and the client quickly started using profit as an additional benchmark for making decisions.

This gave the client a much broader and longer term view of the business and enabled them to understand and immediately see the impact of decisions on business growth and profitability.

This greater understanding of profits helped with day to day planning in particular in relation to staffing levels and accommodation requirements – potentially expensive pitfalls were avoided.