Sin number 11 - Not having reporting systems.
By Greg Carroll
The previous chapters have hopefully highlighted to you the importance of having ready access to your businesses financial indicators. This is best achieved is by having an effective reporting system that monitors the financial performance and health of your business. An effective reporting system will provide you with a range of information that will assist you in your business planning and decision making process:
· It will tell you how you are performing in relation your budget
· It will project your cash flow in line with changes in your business so you know what your forward requirements will be
· Provide you information on your sales, profit margins, and expenses
· It will flag potential problems early
· It will also highlight opportunities such as more profitable areas within your business that might be worth growing
At a minimum a business should have access to the following information at least on a monthly basis:
- Profit and loss
- Balance sheet
- Debtors list
- Creditor list
- Cash flow projection
The good thing is most of these systems don't have to cost a great deal. Programmes like MYOB and Quicken will provide much of this information.
If your business involves the purchase and sale of stock you would also want a report detailing stock inflows and outflows, and individual stock turns so you can quickly identify which stock is turning over and which stock is not. Depending on the size of your business you may need this information on a daily basis.
The important thing however is not just having financial reports but being able to interpret them. In addition to some of the indicators I have discussed previously there are a number of simple ratios you can use to quickly analyse your financial performance. You will find the figures to calculate these ratios in your profit and loss and balance sheet statements. Ideally it is good to look at a number of months or number of year's figures together to see if any trends area developing.
Profitability margins
You want to see these figures improving over time. Improvement in these margins means you getting a better return for you efforts.
Gross profit margin = Gross Profit/Sales
Net profit margin = Net Profit/Sales
Activity ratios
Accounts Receivable reflects how long your debtors are taking to pay you. You want to see this number either steady or decreasing.
Accounts Receivable = Total Debtors/Credit Sales x 365
Accounts payable reflects how long you are taking to pay your creditors. This should at least be steady. An increase indicates you are starting to stretch your payments, which could be an early warning sign for your business.
Accounts Payable = Total Creditors/Purchases x 365
Stock Turnover reflects how long it is taking to turnover your stock from purchase to sale. You want to see this number steady or decreasing.
Stock Turnover = Average Stock/Cost of Goods Sold x 365
Liquidity ratio
This ratio gives you a quick indication of your businesses ability to meet its immediate commitments (Current Liabilities). You want this number to be more than 1 preferably 2 or higher. If you have a Bank Overdraft with an available limit then you can add this figure to your asset side to get an idea of your coverage.
Current Ratio = Current Assets/Current Liabilities
You can use the above to get a quick indication of how you are traveling and how your cash flow is performing. If any one of them start heading in the wrong direction (For example your Stock Turnover in days increases) then this is a warning sign that your cash flow will be under more pressure. So make sure you get familiar with these formulas and use them as often as possible.
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