Benchmarking
January/February 2003

Make use of your BAS and Financial Statements
By Ross Turvey, Business Analyst

D

r Clift, Chief Scientist, Johnson Space Centre, USA was in Australia in July 1995 and spoke to the Royal Society of Victoria. He was trying to educate Australia on the many ways that this nation could be involved in the international space effort. One of the points he made was that there was an extraordinary amount of information generated by the satellites that orbit our planet each hour and that we miss opportunities if we fail to use this information. He related a story propagated by Dr Charles Kennel, NASA's Associate Administrator for Mission to Planet Earth, that data collected by satellites predicted the USA drought 1994/95. The government of Brazil used this information to plant more drought resistant crops and to reduce the size of their herds. Australia should have had access to the same information but we did not because at the time we were simply not taking part. Let's avoid this issue within our own humble businesses and make good use of data and information that we are already collecting and paying for.

One recognised benefit for small business, following the introduction of GST, has been the improvement in record keeping to allow us to report our monthly or quarterly Business Activity Statement (BAS) to the Australian Taxation Office (ATO). Most businesses will have moved to some form of computerised bookkeeping and the majority of small business operators have now become proficient at producing their BAS reports. By default these same operators are now producing financial reports that can be provided readily to their accountants and financial advisers.

How many of you have taken the next step and looked at ways that you can use your BAS details and the profit and loss statements to better manage your business? "Why bother?" you ask. Here are four good reasons and you may well add a few more of your own:
· Keeping on top of your business means it will not get on top of you;
· See more profit from your current sales level;
· Generate a stronger and more predictable cashflow;
· These three benefits will deliver a fourth: a stronger and more valuable business which should be easier to grow or sell later.

Do you ever wonder if your staffing levels are right? Are you worried about the effectiveness of your advertising and promotion campaigns? Do you know how to keep stock levels under control? Let's have a look at a few examples of how your own information, and that provided by your accountant, can be better used.

The staffing level example:
The following table has a calculation that uses the wages cost for the year, takes out the amount paid to the owners of the business and what is left is the wage cost of all your employees. We show how you then might use this information to help your business roster staff and we apply this to a service station example.

Service Station:
Total sales for the year	$2,591,510
Total Wages cost for the year	$200,093
Less wages paid to owners	$46,555
Equals - wages cost for all employees	$153,538
Divide this result by the sales for the business and express the result as a percentage. So over the year 5.93% of turnover was spent on wages for the staff.	5.93%
Or turn this around: take the $sales and divide it by $wages, to show the level of sales from every dollar of staff wages.	$16.88 sales per dollar wages paid.

So how do you use this data when rostering staff? Given that this business turns over say $49,000 per week for most weeks of the year, divide the weekly turnover by the result of $16.88 and you have a weekly staff wages budget of say $2,900. It is your challenge then to roster the people you employ so that you have the right number of people on hand (probably a mix of casuals and full timers) to service your sales and stay within the $2,900 weekly budget. Spending more will eat into your profits. We have now taken the financial figures that are available to you monthly, quarterly and annually and shown how simply they can be used as an appropriate management tool.

The advertising and promotions example:
As for wages, the same exercise can be done for advertising. Find out how much you are spending on advertising - normally in your profit and loss statement. Do the following calculation: we have used a corner store example.

Corner Store:
Total sales for the year	$507,950
Advertising and promotion including signage, ads, brochures etc.	$2,308
Divide this cost by the sales for the business and express the result as a percentage. So over the year 0.45% of turnover was spent on advertising and promotion.	0.45%
Or turn this around: take the $sales and divide it by $ of advertising cost, to show the level of sales from every dollar of advertising.	$220.00 sales per dollar of advertising.

So you earn $220 of sales for every dollar spent on advertising. You might use this then as your target - any promotion that does not return 220 times its cost needs to be looked at and possibly dropped.

Keeping stock levels under control example:
Let's see how you can prevent your stock level from "blowing out". In this example we will return to our service station example.

Service Station:
Total sales for the year	$2,591,510
Cost of Goods Sold (COGS)	$2,267,500
Divide this result by the sales for the business and express the result as a percentage. So over the year 87.50% of turnover was spent on goods for resale.	87.50%
This can in turn be expressed as the level of sales per week, say	$49,000
COGS at 87.5%	$42,875
Stock of goods, materials and fuel	$227,000

So if you spend $42,875 per week buying new stock then your stock level will be the same in dollar terms at the end of the week as it was at the start of the week.

However, what if you have decided that you are already carrying too much stock and you want to reduce the value of stock by say $50,000 over the year? If you divide this figure by 52 weeks, then you will need to reduce stock gradually by say $960 per week, every week of the year. So instead of spending $42,875 per week to buy new stock, your purchases budget is $41,915 per week. The task is to exercise care as you buy the "must have" items - the ones you cannot afford to run out of. Have enough "seasonal" stock lines or the "latest fad" products. See if you have "excess stock" in the slow moving product lines and don't buy any more of those for a while.

As you can see, we have taken the readily available financial data that you will find in your BAS and profit and loss statements for the business and used them to help evaluate some everyday business decisions. Apply the above tests to your business and see the benefits in improved cashflow and profits.

Feedback corner: Let us know what you would like covered in future issues and we will be pleased to pull together some suitable material. Call Catherine or Ross on 1300555334.