During periods when demand for your goods and services drop – for example, if the economy moves into recession – your sales and incoming cash receipts tend to drop at a faster rate than you are able to reduce your outgoings.
These outgoings or expenses tend to fall into one of the following groups:
- Those that tend to vary in direct proportion to your sales: buying raw material or stock for resale.
- Fixed overheads: rents, rates, wages, and other recurring costs.
- Repayment of loans or other debts.
- Adjusting your personal drawings from your business.
Variable costs can be reduced quickly once a downward sales trend is confirmed. Fixed costs can also be reduced but over a longer time period. Debt repayments may be fixed and therefore inflexible. And it will no doubt take time to make any reductions in your own spending to facilitate reducing drawings.
During a time when costs overtake income, losses occur. If losses are significant, they may exhaust any reserves you have built up in your business. When this happens, you are in danger of becoming insolvent (liabilities exceeding assets).
Consequently, if your business is experiencing a downturn, keeping your accounts up-to-date is of paramount importance. Most accounting software will produce a balance sheet and we can show you how to monitor this report to warn you of approaching insolvency.
Please call if you need help to organise your record keeping and provide you with the information you will need.