Proper financial management is critical for every business owner because it helps you to make timely, well-informed decisions in response to changing conditions. More often than not, many business owners look at financial reports at year-end, when it’s time to prepare taxes, or months later when financial statements become available. The lack of attention to financial results may be putting your business at risk.
Review Your Key Financial Measurements Every Month
Be disciplined in reviewing financial data at least on a monthly basis and perform a more thorough analysis every quarter.
You should compare your company’s performance to objectives you set at the beginning of the year, based on your long-term plan. Throughout the year, you can make adjustments as necessary to accomplish your objectives.
Reviewing your financial data frequently (monthly) will help you to make decisions at the right time; if you wait until year end to address issues, it may be too late. The key performance indicators are used most effectively when results over several periods are compared. This allows you to follow your company’s performance over time and uncover signs of trouble.
Key Financial Measurements Fall Into These Five Categories
Growth: Are your sales and profits increasing or decreasing year-over-year? Is there a trend?
Profitability: Is your business making enough profit compared to other similar companies?
Liquidity: Can the company meet its short-term obligations? Leverage: Is the company taking advantage of financing to operate and grow?
Utilization (Asset Management): Are you managing the assets of the company effectively?
These five elements have a significant impact on your cash flow, therefor, it’s critical for business owners to project and monitor cash flow. Even a profitable company can quickly find itself in trouble if it doesn’t have enough cash to operate. In order to proactively manage your business, you should know your cash needs in advance. If you wait until you need the funds, you’re putting the company at risk.
One way to analyze the key financial measurements is by using financial ratios. The financial ratios provide objective ways to compare and evaluate the relationships between different components of your financial information.
Benchmark Your Financial Performance
To help evaluate your financial performance, benchmark the financial performance of your business against that of similar companies in the same industry. Results that are below the average may highlight areas for improvement. For instance, a lower gross profit margin might indicate pricing issues based on an inaccurate estimate of costs. To solve the situation, you will likely have to reduce costs, increase prices or a combination of the two.
Having the right information at the right time will help you make well-informed, educated decisions.