What’s your Business telling you?

In the constantly changing world of business, it's crucial to have a clear understanding of your company's financial performance. Just like driving a car without a functioning speedometer, operating your business without tracking your financial results can leave you flying blind.

You might have a gut feeling about how your business is doing based on past experiences. But what happens when you encounter unknown challenges or enter uncharted territories? Suddenly, your instincts alone are no longer sufficient.

Tracking your financial results is like having a reliable speedometer for your business. It enables you to gauge your progress accurately and make informed decisions about the direction of your company. Just as a broken speedometer can lead to catastrophic consequences, neglecting key financial measures can expose you to risks such as overspending, undercharging, or missing out on growth opportunities.

In today's economic climate, which can be as unpredictable as navigating a gravel road in New Zealand, having the right tools at your disposal can make all the difference. By implementing effective financial analysis methods, you can gain the insights needed to make your business journey less daunting and more successful.

So what should you be looking at?

There are many financial metrics available to give insight into the health of your business. When things are feeling a bit tight or there is a large amount of uncertainty around the place, we suggest starting with the following to help you be in a proactive position rather than reactive.

Revenue Growth

Keeping an eye on your revenue growth compared to a previous period (usually the same period last year) can signal whether you need to change your marketing approach or whether new strategies are working. In this current climate, if your revenue is slowing, consider switching up your sales approach and cutting back on unnecessary expenses. Remember, your growth rate needs to be higher than inflation to take into account standard price increases.

Gross Profit Margin

Gross profit margin shows your revenue after deducting the direct costs of making a product or delivering a service, but as a percentage of sales so that you have a comparable number to keep an eye on. If your margin is decreasing, it may signal you need to increase your prices or re-negotiate with your suppliers.

Accounts Receivable Days

The time in which your customers pay can have a significant impact on cashflow. Your optimal number to aim for can depend on a range of factors such as your industry and payment terms however, the higher your number is the longer it is taking for you to collect money from your customers. There are many things you can do to lessen the impact of longer receivables or to reduce this number and remember, following up on late payments in a timely manner can be all the difference for you having money in the bank to pay your own creditors.

Utilising the aged receivables report in your accounting software regularly is a great practice to get into

Operating Cash Flow

The saying “cash is king” is for a reason, cash flow is one of the key reasons businesses can struggle, even if the business appears to be doing successful in terms of sales and net profit. Without enough cash coming in (or too much going out), there may not be enough cash in the bank to cover key expenses such as wages, rent, finance payments, and other regular operating expenses that don’t stop just because cash in has slowed down.

You can calculate your operating cashflow using the formula below however we recommend looking at your cashflow reports in your accounting system to get a good understanding of your cashflow, even a Profit and Loss report on a cash basis can give you clear insight on what your funds are doing over a time period.

A cashflow forecast can be a powerful tool in evaluating your business’s future cashflow requirements, enabling you to proactively navigate the impact that fluctuations of cash may throw your way.

These measures are just a start and there are many others relating to customer service, debt, liquidity, return on funds, and more that can all give an indication of the health of your business. By taking the approach that your financial results are the speedometer of your business, you can gain the knowledge to navigate confidently, make informed decisions, and steer towards sustained success.

If you want to hear more or discuss further, get in touch with your client manager or subscribe to our newsletter for future articles.