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 company’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 spiraling 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 $100,000 this month
to cover fixed and variable costs, are you selling enough products or providing
enough services 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 company’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 companies, especially, can find that labor expenses grow
too rapidly. A decline in orders may signal a need to reduce payroll costs.
By carefully
analyzing your business’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 key 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 company on the right track.
