UK: Beyond Financial Statements

Last Updated: 10 December 2012

The profit and loss sheet only lists income and expenses. It doesn't give you a clue regarding the relationships between the numbers. Some entrepreneurs are top-line junkies and look only at gross sales while others pay attention only to the bottom line (net income), but that doesn't tell you the whole story of the business, either. Cash flow planning – where you lay out your cash flow needs, requirements and projections for a specified period of time – provides a much better picture of what is really happening in the business.

Cash flow planning: Look at the difference

Comparing your actual cash flow to your plan tells you where you are versus where you want to be. It allows you to see where the differences are and why you're not doing what you want to be doing. Then you can make some proactive (rather than reactive) changes to improve operations.

When developing a cash management plan, you need to know three things:

  1. How much cash you will need to run the business.
  2. When you will need it.
  3. Where you will get it.

Net income and cash flow are very different. You can show a profit on paper and still run out of cash. Cash flow doesn't necessarily equate to profit and loss.

Balance sheet projections

A forecast balance sheet is a reality check. Projections should focus on the following items:

  • cash
  • receivables
  • accounts payable
  • inventory/work in process
  • debt and equity.

Your goal should be to produce financial statements – the P&L and balance sheet – no later than the 20th of each month. Very large companies may take longer. Some small companies can do it in ten days or less. You should be able to answer three very important questions:

  1. When will our cash balance drop to its lowest level?
  2. When will we run out of cash?
  3. How long will our present cash resources last?

Marketing budget

In addition to a cash flow plan, it's a good idea to do a marketing plan that includes a budget for the following 12 months. Marketing can be a fiscal black hole; managing and measuring the return for dollars invested can give vital information about how well the marketing budget is being spent.

Consider using zero-based budgeting. First, ask: "Do we really need this?" for every line item. If the answer is "yes", start from zero and build up from there. Don't start with last year's total and try to cut down. Keep in mind that every dollar you take out of the expense section falls straight to the bottom line.

Budgeted expenditures need to meet the following criteria:

  • Does the expenditure increase sales?
  • Does the expenditure increase ROI?
  • Does the expenditure increase cash flow?

If the answers to those questions are negative, then inclusion of the line item or position in the budget needs to be questioned.

Increasing revenues

There are four ways to increase the revenue stream:

  1. Increase the number of customers you serve (of the type you want).
  2. Increase the number of times your customers come back (or refer others).
  3. Increase the average value of each sale.
  4. Increase the effectiveness of the business.

It costs about eight times more to acquire a new customer than to retain a current customer. Getting even 5% of your customers to come back more often during the year can dramatically increase revenues. Product bundling, additional referral sources, scripted sales calls, changes in the product or service and special promotions are just some of the ways you can entice customers to come back more often.

An often-quoted statistic is that 20% of your customers yield 80% of your business. It's a statistic you should investigate. Go through your customer list and identify the top 20% and look for ways to increase their business with you. Next, go through the remaining 80% and decide whether or not to keep them. If you can, track the gross profit on each customer. Get rid of those who aren't profitable.

Of course, you can only streamline a small business so much on the cost side. Focusing on the revenue drivers gives you a much better chance of increasing the value of the business. Adopt the mindset that one day you will sell your business for the maximum value. You'll manage the business differently than if you're just trying to get an income from it.

Price sensitivity

Setting prices is one of the trickiest parts of running a business. You can increase profits by increasing price as long as any decline in volume is offset by the price increase. Conversely, you can increase profit by decreasing price as long as the increase in volume offsets the decrease at the gross margin level. Before you lower prices, however, make sure you understand how much harder you will have to work to maintain current margins.

For example, to decrease price by 16% on a product with a 30% margin, you need to increase volume by 114% in order to maintain the same level of profitability. The numbers don't always tell the full story. Increased sales means increased activity below the gross margin line. For every additional sale, you incur other costs, such as more commissions, or more invoicing and order processing activity, that fall below the gross margin line.

Managing business processes

Traditional accounting statements measure results, not activities. It is impossible to directly manage a result, but you can manage the activities that give rise to the result. Fortunately, there are processes that can give you information much more quickly than the backward-looking financial statements. These processes allow you to manage the business proactively rather than reactively.

Measures such as the average number of sales per day, the average amount of each sale, responses to advertising, close rates on such responses, are just a few. The US Inc. magazine once ran an article on a steel rebar manufacturer that tracked one measurement: number of pounds shipped per day. The business owner knew his prices and margins and knew what he had to ship per day to meet his plan. If shipments lagged, he could react quickly and not wait for the financial statements to see how he did.


You can never make it too easy for your customers to give you money. If you don't currently take credit cards, take them. Find ways to speed up your accounts receivable process. We also recommend having strict credit control and collections policies, and running credit checks on new customers, especially large ones. Don't hesitate to ask for a credit application and check it out.

Focus on gross margin

Too often, companies focus only on gross sales, when other leading indicators are far more important. Gross margins (sales price minus cost of sales) are critical. Don't take on customers unless you can achieve your desired gross margin. An unprofitable customer is worse than no customer at all.

Customer advisory board

We advise developing a customer advisory board to find out what is important to your customers and what they don't like about doing business with your industry. If you can overcome the negatives of your industry, you can gain a lot of customer loyalty.

Invite a good cross-section of customers to a meeting, thank them for coming and then leave. Use an outside facilitator to ask the questions and facilitate the meeting. Customers will be a lot more open and honest when you aren't in the room. This kind of focus group yields a lot more information than just sending out a survey.

Critical success factors

What do you absolutely need to get right in order to succeed? The answers are different for every business. Success always comes back to the quality of the product and quality of the service. But it's the customer's perception of quality that matters, not ours. So focus on the things that form the customer's perception of quality.

For a physical product, quality can mean a number of things, including:

  • performance
  • features
  • reliability/dependability
  • durability
  • conformity (to customer, industry, etc., standards)
  • serviceability
  • aesthetics.

For a service business, quality might mean:

  • intangibles
  • reliability
  • timely response
  • assurance of service delivery
  • empathy
  • communication
  • confidentiality.

Key performance indicators

Key performance indicators measuring time, size, dollars, numbers, percentages and other factors are financial or non-financial measures of an activity. These, too, vary for each business and industry. Some common ones include:

  • sales per employee
  • sales per dollar of salary
  • inbound calls and conversion rate on inbound calls
  • sales per foot traffic
  • number of sales per day
  • average sale
  • number of pounds shipped
  • order backlog
  • work in progress
  • number of bids submitted versus number of bids converted.

Identify the five or six critical success factors you absolutely must get right in order to make your business a success. In particular, look for things that frustrate your clients, such as lack of timely delivery or accessibility.

Once you have decided what key performance indicators you need to measure, identify the data you need to capture. When you have the baseline numbers, we recommend setting target performance indicators and tracking them using some kind of performance analysis sheet. Input the information for each period covered – daily, weekly or monthly, depending on your business cycles – and compare actual results with projections.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.