If you hold stock or work in progress in your business, then the value of this stock has a huge impact on your profit.
Imagine a scenario where you buy £10,000 of goods and sell £2,500 worth of them for £5,000. Your loss, when not accounting for stock, would be £5,000. Sales less Purchases = Profit or £5000 – £10,000 = £5,000 loss.
Now, if we account for the stock left of £7,500, you would see a £2,500 profit. Sales less Purchases (minus stock) = Profit or £5000 – (£10,000 – £7500) = £2,500.
Therefore, if you hold stock in your business you must know what the value of it is at the end of each month so that you can get a realistic profit figure.
Major Headache Alert!
Most business owners find the process of counting their stock at the end of each month a real pain. However, without this vital piece of the puzzle, accurate profit figures are impossible to calculate.
Is there a quicker way?
Unfortunately, no, a physical stock count is necessary, at least, a count of your higher value items.
Each month, count what stock you hold and then adjust the accounts for the difference between that and last month’s count.
There are stock systems available that will aid you in keeping a track on the stock such as Zoho Inventory, Dear Inventory and Unleashed Software. But even if you use these nothing replaces a good old-fashioned count up of stock.
What else can affect your profit?
Whilst stock is one the biggest determiners of accurate profit it is not alone – adjustments should be made for pre-payments, accruals and depreciation. These will help ensure your profit is accurate as profit.
Why do I need accurate profit?
By ensuring a profit each month you will have:
- Better Decisions – a decision based on financial information rather than gut feeling will ensure your business has a better chance of survival.
- More chance to grow – if you know your finances then you will be more confident to grow the business and this growth will be easier to achieve
- Better Focus – you will be able to pinpoint the areas of the business that are causing your problem – do you have a sales issue?, do you have a cost control issue? without the detail it’s hard to identify what needs fixing
Management Accounts as standard
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