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Is Not All About Numbers
For those business owners who feel they don't have strong financial backgrounds, rest easy. Financial management is really about understanding what those numbers represent. It is really all about managing those underlying facts and conditions.
This means you can effectively manage your business finances by ensuring:
a) you manage your cash
A comprehensive cash flow
statement is typically broken down into three categories: operating,
investing and financing cash flow. As indicated, it aggregates cash flow
from operations with cash flows from financing activities, ie getting
and repaying loans, and from investing activities, i.e. buying and
selling assets such as equipment.
Numerous valuable ratios exist. The important part here is to know which ratios to track and what they tell you about the state of your business.
The three most important balance sheet ratios are:
a) The Current Ratio,
which is current assets divided by current liabilities
The current and quick ratios measure the company's ability to pay its bills as they come due, while the debt equity ratio measures the company's ability to survive over the long-term.
The income statement focuses on revenues, expenses and net income (or loss) over a defined period of time. It measures the company's ability to turn sales/revenues into profits.
Its most important numbers are total sales, gross margin ( total sales less all direct, variable costs), net operating income, income before taxes and interest, and after tax income. A useful exercise is to calculate all expenses as a percentage of sales, then track these percentages over time.
Many other financial statement ratios exist. You can talk to your accountant who should be able to guide you in choosing the best ones. What is important is to look at trends. Measuring increases and decreases over time tells you exactly how the business is performing. For example, taking a very simple example, sales per sales employee is certainly good as a means of measuring individual sales people in a given month, but decreases over time point to problems with your sales force.
One of the most important non-financial indicators any business must track is what causes sales. When you know, you can devote resources to ensuring sales happen, and when sales decrease, you can immediately take action. Every business has one or two primary activities that causes sales to be made. Maybe it’s the number of enquiries, sales calls, referrals, walk in traffic, networking events attended, seminars given…only you know. Identify them (and most often it is only one or two key things) and track it and influence it.
Use the same approach for all elements of your business. Using the "what causes" approach, ask what causes operations to be more profitable? What causes an increase in customer satisfaction? What causes employee satisfaction? Answer these questions and then measure and track and trend those activities. These are your non financial key performance indicators.
Whichever they are for your business, keep in mind that KPI’s should be measurable and representable by a number, they should relate to company activities and processes, they should tell you if you are regressing or improving, and acting on the underlying activities should effect a change in profitability, cash flow, or some other important measure of success.
Management information needs to be presented in a way that makes the important trends easy to see. You achieve this by restricting the number of figures you monitor per report, and by visual representation using graphs and charts. Exceptions reporting, which highlights only those issues that need attention, is another good practice, though all results should still be reported.
In addition, those preparing reports should include a written commentary which includes input from those closest to the activity. This commentary should explain any important changes and the reasons behind them, which is then incorporated into the decision you make about who should do what, how, where and when to get you back on track.
The first step is to establish a reliable financial reporting system that delivers the requirements for both financial reporting and KPI reporting. Ensure you segment your business by products, markets, customers and any other meaningful sorts, and that you have an accurate costing system that attaches the appropriate costs to each segment and activity. This is the infrastructure. Now make sure the people side works by ensuring those responsible for activities are in fact empowered to make decisions, are accountable for them, and most importantly, recognized and compensated for their wins and success in achieving set goals. Ensure you widely communicate all expectations and results, and continuously promote and support improvement in your KPI’s
In addition, it helps if
you yourself look for ways to improve. After all, your attitude is your
own firm’s KPI. Have your key staff members ask questions and challenge
your thinking, learn about new tools that help deliver better
information in better ways, be open to new techniques, train your staff
and encourage them to improve themselves. Your attitude towards
developing and reporting KPI’s , and using them to improve the business,
will rub off. As will slacking off the discipline.
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