So much of business success depends on understanding the numbers (a.k.a. financial intelligence). If numbers either scare or bore you, understand even a little extra insight into the fundamentals of successful financial management makes your business more successful.
Strong business financial performance requires good profitability through healthy sales margins and ongoing sustainability… Through controlling costs and liquidity. At a minimum, regular monthly reports of the Income Statement (Profit & Loss account) and Balance Sheet will shed some light on the financial position of the business. Provided the reader has the knowledge to interpret them correctly. These reports are readily available through most accounting software packages (eg MYOB, Quickbooks etc.)
However, more useful information on where the business is or isn’t performing can be gained. We as business owners need to get to a greater depth of analysis of key areas that affect financial performance. Competent regular financial performance measurements provide a ‘scorecard’ for a business. Furthermore, it can identify where the focus of the people in the business needs to be to turn around an area of concern in a timely manner. Before it gets out of hand. This is about filling the financial information gaps, so that the responsible business person can make more informed business decisions in daily operations.
Useful information on where the business is or is not performing, from a financial point of view, can be gained through analysis of:
Profits: Gross, Net and Net Operating Profit
Cash flow cycle
Actual to budget comparisons
Work in Progress rate
Inventory turnover rate
Accounts receivable (Debtors) rate
Accounts payable (Creditors) rate
The correct interpretation of the results of the analysis (by a qualified management accountant) can determine if an ‘action alert’ (call to urgent action) is necessary in any particular area(s). This is about filling the financial information gaps so that the responsible business person can make more informed business decisions in daily operations. If gross profit, say, is not up to industry standards or falling below the budgeted figure there can be a number of reasons. One or more of the products/services may be priced too low – not a sufficient profit margin. The direct costs (or cost of goods sold) related to one or more of the products/services may be too high – maybe a change of supplier is needed. Or it may be a combination of these things.
What about the profit margin at the net profit level on an individual product/service! Can this be determined? Well, yes it can or a least a very good estimate can be made. So it is possible to know which products/services are profitable for the business and more importantly-which are not. It may also be necessary to reduce the other costs of the business (those that are incurred regardless of any sales – or indirect costs, such as rent, administration, etc).
Don’t just rely on the P&L and Balance Sheet. Have a look at any of the above measures to see if they help you manage your financial performance more effcetively – making your business more successful as a result.