Up to date financial information will help your decision making
More than ever I am finding that business owners want to keep a closer eye on their finances. This trend started during the last recession when trading became tough and has been further highlighted with the huge impact on many of the covid-19 pandemic.
I have always encouraged businesses to measure the financial performance of their business as they go rather than waiting until the financial year end and the accounts production by their accountant.
Today with the cloud accounting software that is available, such as Xero, we can all have our up to date finances at our fingertips.
When I first start working with my clients I find that many are more regularly reviewing turnover and profit figures. However I encourage businesses to also look deeper than just the black and white resulting figures in your accounts and understand the ‘real’ numbers in your business.
Turnover, margin, profit and cash are simply outcomes. What are the key numbers that drive the success of your business? For example, if we took Turnover, then how is that accounted for? Is it the number of people you sell to, the number of times they buy and the average sales value per transaction? If so, you can measure the activity around these numbers and you won’t be surprised at the end of the month when many are often reflecting on their performance.
Additionally, if you have build your forecast on this breakdown, then you know how to improve performance rather than just trying hard to hit the target next month.
When looking at the numbers in your accounts I believe that you have to look beyond the actual resulting numbers. As an example, I was speaking with a business last year who were delighted that their turnover was increasing. However, that was the only number they were focused on. For some businesses, that sole focus may have a purpose, such as in relation to their valuation. When we reflected on their cost of sales and their overheads, these were also increasing and the resulting profit was hardly different. Therefore, they were working harder, with more customers and the related time sapping activity, for the same result!
On a day to day basis, good financial information can better support your key decision making.
When reviewing your accounts, perhaps to support those critical decisions in your business, then I suggest a couple of considerations.
Firstly, cash is king, but don’t just focus what is in the bank account. This is one of the biggest reasons why some business owners don’t take their business to the next level. They look in the bank and think ‘I can’t afford that’. However, their cash may be tied up in monies owed by debtors or stock turnover. Additionally, their ‘work in progress’ may result in new invoices being raised and paid before the considered expenditure falls due.
When a decision requiring an investment is needed, then do reflect on your Current Assets – your Liabilities due.
I often use the equation of cash in bank + debtors + work in progress – liabilities due to provide a true reflection of the position in the business for further investment. For this equation, I assume that any cash reserves are held in a bank account, but if elsewhere then this should also be included.
I also recommend you to forecast your business and run ‘what if’ sensitivity scenarios. Consider what you expect the business to deliver in the next period and also reflect on what action would be needed if something impacted the business. For example, What if….. interest rates doubled or taxation rates increased (well a budget is coming!)? If your best customer left? If your best salesperson resigned? If your production line failed?
Additionally, when analysing your financial accounts, I encourage you to use ratios to analyse any trends. This ‘like for like’ comparison is important for a consistent reflection of your performance. For example, if your turnover is increasing, are the costs and related profit increasing at the same rate. Some of the ratios I encourage you to measure are:
Gross or Net profit margin
Stock turnover ratio
Productivity – Staff costs vs income
Return on investment
A specific cost vs income
It is also likely that your bank, lender, investor or funder will be analysing your financial information in this way and from experience it can only help your application for finance, or discussions, if you can talk confidently about this type of detail in your finances.
Having worked in finance roles throughout my 50+ years, I have seen the benefit of focusing on the ‘real’ numbers in your accounts to help you make the best informed decisions.