Each month when you receive your financial reports, what insights come along with them? If you’re the business owner or president, you should be asking this question. If you’re responsible for delivering the reporting package, you should be striving to provide some insight based upon the results of the prior month and as well as your knowledge of current events. I’ll admit, there are months that suggest “stay the course” with no unexpected information coming from the financial statements.
If you’re simply getting a package of data dropped on your desk, you’re being underserved. And if you’re not taking the time to study it, then you’re under-serving yourself and your company. I’ve known business owners who have told me they never looked at their financial reports. For the most part, these business owners run the business by looking at how much cash they have in the bank. If they have what they believe to be a sufficient amount of cash, then everything must be OK. If cash gets low, they start to panic.
But that’s no way to run a railroad. Sure, cash is important but the worst place to look for that number is the bank balance. Rather, one should look on the company’s general ledger. Those checks you wrote yesterday have not yet cleared the bank but the cash is no longer yours. Cash is the end product of profitability. It’s the last link in the chain and if the business is posting a healthy profit, then the cash will certainly be there absent capital structure issues (such as too much leverage or excess distributions).
But back to my point on insights. Each month, the financial reporting process should be used to deliver a new insight into business performance. This needn’t come solely from the financial reports, however. Often, I find these by reviewing operating or sales reports. At other times, the insights stem from the group discussion of results in the monthly management meeting.
Need a few ideas to get the ball rolling?
- Shifts in revenue concentration among customers or product lines
- Changes in gross profit margins either overall or by customer or product
- Increasing levels of inventory to accommodate supply chain issues resulting in consumption of cash or limiting cash growth
- Change in labor efficiency, perhaps as a result of product/service mix or machine performance (due to breakdowns or improvement investments)
- Shifts in credit usage especially when comparing to prior years in seasonal businesses
- Changes in customer payment cycles
- Increases or decreases in breakeven revenue level due to changes in fixed overhead
- Comparisons to peer groups or industry norms when available
Strive to gain one meaningful insight per month that is worthy of deeper thought and action. You might not always be successful, but a handful of changes each year will have a meaningful impact, especially when they compound over multiple years.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
your cash is flowing. know where.®
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