Regardless of the type of business you’re running – whether it’s selling electronics, making furniture, or servicing automobiles – monitoring a few key financial indicators is often all that’s needed to keep your company growing and prosperous. On the other hand, neglecting a firm’s vital signs can lead to management by crisis and corrective action that’s too little, too late.
A prudent business owner won’t wait until the end of the year (or even the end of the quarter) to learn that revenues are declining, inventories are shrinking, or payroll expenses are spiralling out of control. Although annual financial statements provide historical perspective and a wealth of data for long-term planning, correcting current problems is a matter of timely insight and informed analysis. You want to know whether your business is losing money or growing – now, not later.
A company’s key financial indicators often fall into one or more of the following categories:
- Orders and returns. Are you selling more units over time? To find out, look at your sales figures by units. Tracking revenues alone may present a false picture. After all, revenues may be growing because prices have increased. If unit sales are declining, you might be losing market share. Are customers returning more and more of your products? Are complaints increasing? If so, it may be time to examine your quality control process or return policy.
- Breakeven point. If you need more cash this month to cover fixed and variable costs, are you generating enough revenue to break even? If you’re dipping into reserves to cover revenue shortfalls, adjustments may be required. Expenses may need to be slashed, a new advertising campaign launched, or a new and cheaper supplier procured.
- Liquidity. Knowing the availability of cash is vital to every business. That’s why reconciling the firm’s bank statements shouldn’t be an afterthought. Every month your accountant or bookkeeper should ensure that your general ledger agrees with the bank’s records of deposits and withdrawals. If a company is “bleeding cash,” the bank statements should tell the story.
- Inventory. Controlling the stuff that’s weighing down your retail shelves or accumulating in your warehouse is often a key to profitability. Buying too many items may lead to excessive storage costs; buying too little may lead to burgeoning backorders and lost sales.
- Payroll. Staff size should be commensurate with revenues. Medium-sized firms, especially, may find that labour expenses grow too rapidly. A decline in orders may signal a need to reduce payroll costs.
By carefully analyzing your firm’s operations, you’ll be able to identify the indicators that provide the clearest view of your company’s ongoing profitability.
Over time your business’s key numbers may change. The secret is to know your company, identify changing conditions, and adapt. A brief but timely report that presents the numbers that really matter will help to keep your firm on the right track.