There are many aspects of business that are important to manage — goal-setting, sales and marketing, productivity, team building.
Every business must consistently master the delivery of their product or service. However, achieving financial mastery is the most important element for gaining control and predicting future success.
There are four important financial documents used in all business operations and these should be reviewed on a regular basis.
A budget outlines your company’s financial and operational goals and is used as a planning tool to help allocate resources and evaluate performance. Budgets are normally prepared once a year, but should be reviewed monthly, weekly or daily, depending on the type of business you operate.
Whether you operate a new or established business, the most important financial statement is the cash flow statement. Your accounts payable — how much you owe others, and accounts receivable — how much others owe you, forecast a week-by-week flow of money in and out of the business.
Even a well-run business can fall prey to cash flow problems. Sales may be strong, but if there is a major gap between your customer receivables and your payables to suppliers and employees, you have a major cash flow gap.
Bad debt, the delayed or non-payment on your payables, will have a serious impact on your business.
If your company falls into these circumstances, vendors may restrict access to payment terms and put you in a COD situation. Your employees may look for work elsewhere.
The profit and loss statement (P & L) depicts your revenue minus your expenses, indicating how much money you earned, or lost, over a specific period.
This document, also known as the income statement, gives you a sense for how well the business is doing.
The balance sheet is a snapshot of business operations that shows what its financial position is at any point in time.
The document reports your assets and subtracts liabilities to indicate owner’s equity in the business.
Inventories can make up a significant per cent of a company’s current assets, and deserve scrutiny. Review the level of inventory in relation to overall sales.
Look for cyclical periods to determine if inventory levels need to increase or decrease. Do not tie up money in unnecessary inventory.
A key to financial mastery is profit management. I like to use several indicators.
Do you know your “break-even point” — the level of sales that are required to just cover all costs incurred during a given reporting period? It is that point at which all costs and revenue for your business are equal. There is neither a profit nor a loss at the break-even point.
Why is it important to know your break-even point?
It is the threshold of profit. If you do not know what it takes to cover all your costs, you will not know what it takes for your business to make a profit.
Profit per customer looks at what makes your customers come back and buy. A subtle shift to a higher level of service, or more improved or higher margin products, can increase the number of repeat transactions
Look for ways to improve profit per product/service by negotiating better deals with suppliers. Is an investment in new technology a way your company can reduce production costs?
Take time to evaluate whether a more efficient method is available at a more effective price. Is there a process that you can do in-house, or should you out-source some items?
Do you know what profits you obtain from each position or team member (profit per employee)?
This means you need to establish the right positions and hire the right people for the job. Motivated employees and dependable systems will result in a high-calibre team.
Your goal is to operate the most cost-effective and productive team possible.
Financial statements and indicators are crucial. They tell you what has happened in the past, but also inform you to what is probable in the future.
Employ professionals — an experienced bookkeeper and accountant will help you to uncover problems and identify corrective action. Ask them to help you develop profit-and-loss and cash-flow forecasts. These forecasts, plus financial reports, will provide you with meaningful data.
Know your numbers! Remember, the more you learn, the more you earn.
ActionCoach is written by John MacKenzie of ActionCoach, which helps small- to medium-sized businesses and other organizations. He can be contacted at johnmackenzie@actioncoach.com or by phone at 403-340-0880.