Probe your past financial results to create a brighter future
Unmistakably, the most important thing for your business is what happens today and tomorrow. However, past results can be a goldmine of information about what went well and what could be done better, so inform your decisions about the coming year and beyond. Look back to move forward is a positive business strategy.
Legendary businessman Warren Buffet said “In the business world, the rearview mirror is always clearer than the windshield”.
With the 2019-2020 year already well under way, I recommend you review your 2018-19 financial results against both your budget and prior year results. Differences and departures carry insights and can draw the eye. Dig a little deeper and you will find even more great insights.
Profit and Loss
Your profit and loss statement summarises the total revenues and expenses incurred by the business, showing whether your business made a net profit or net loss for the period.
How has your sales and income changed? Did you exceed or under-achieve against your business’ income targets? Were your revenue targets eroded by excessive discounting?
Examine your revenue in more detail to identify changes in your sources of revenue.
Have certain clients increased their business with you? Have other clients have reduced their business? Do you need to reconnect to protect your business relationships with key clients?
Which products are driving your revenue? Are there identifiable trends and what causes them? What are the likely impacts if those trends continue and how should you react?
How have your expenses changed? Is the movement in your business’ expenses proportional to revenue changes? Are you driving a result out of each dollar spent?
Drill down into your expense data for changes in your fixed expenses and variable expenses. Understanding your expenses in detail will help you to make decisions about your business operations, structure and staffing, and to understand the impact of those decisions.
Your Balance Sheet lists all of your assets and liabilities and calculates your net assets (which should equal equity if your balance sheet balances!).
How has this changed over the years? Are you building net assets and if you are, are those assets liquid or illiquid? Do you have adequate insurance? Asset protection – are your assets protected from ‘creditors and predators’?
Do you have sufficient working capital? Can your business generate cash to meet your short-term financial commitments? What is the relationship between debt and equity and are you comfortable with that?
And what of debt? Do you have enough and the right type? Do you have undrawn facilities you could call upon in need?
What about completeness and accuracy? Have you captured all of your assets? All of your liabilities? Are they carried at the right value or are you kidding yourself? Should you be writing some things off, or providing for a diminution in value?
Spend some time on accounts receivable. Managing your accounts receivable has a major effect on your cash flow. Even profitable businesses can hit difficulties if their cash flow is not effectively managed.
Probing your accounts receivable ageing report will identify how much cash you have tied up due to slow paying clients and delinquent accounts, so you can initiate collection procedures or consider taking further corrective action. Clean out anything that is uncollectable and collect the rest.
Cash Flow Statement
Your cash flow statement tracks all the money flowing in and out of your business, so gives important insights into how and where your business generates and uses cash.
Remember, many businesses are bought and sold on ‘free cash flow’ so pay particular attention to operating cash flows.
So, whilst I am a massive fan of the ‘eyes forward’ mentality, I reckon that moving forward without so much as a glance in the rear-view mirror has the potential to be viewed as being a bit ignorant. It’s the same reason big business the world over employ highly paid CFO’s and MD’s who also pore over last month’s results.
If you accept what I say, then you will accept that your financial results are more than an EOFY activity. They’re a valuable tool for identifying areas for improvement in your business. That type of activity can and should be done on a regular basis.
Now, I quite appreciate that you probably don’t have a CFO to help you out and maybe you’re not quite sure what you’re looking for. But if that’s the case and you want to use your past results to drive a better future, that’s something we can help you with.
Contact the BridgePoint team today on 1300 656 141.