Limited company, four owner-directors and thirty staff, manufacturing specialist engineering products, with two distinct product lines. The company enjoyed secure contracts with major blue-chip customers, and made consistent although unspectacular profits for many years. Our initial involvement, building a financial model for the company's annual tendering process, led us to suspect that the minor product line was unprofitable.
Following our appointment, Taxsmiths® quickly re-structured the bookkeeping and accounting records so that the firm's two product lines were accounted for separately. Purchase invoices were allocated to department "A" or "B", direct costs such as materials and labour were allocated to each department, as well as shared administrative and transport costs being apportioned to each. We soon discovered that one of the product lines made a very healthy profit, whilst the second product line, which was labour intensive and resource-greedy, ran at a huge loss. Armed with that knowledge, the directors were able to take remedial action, re-structuring the loss-making department and increasing the factory-gate price of its unprofitable lines.
We have found that many businesses can benefit from breaking down their accounting function to record separate facets of their operations. That might, for example, be separate product lines, or separate departments or branches, or separate cost-centres for firms operating on different sites or in different markets. Similarly, a breakdown of other facets such as sales mix or sales staff performance could help highlight strong and weak areas of a business. It's really just a matter of setting-up an accounting system that breaks the records down into the components that are the most critical to your particular business, and the most sensitive to variance.