Staying Ahead of the Game

For the owner/manager, successfully managing a business and knowing when to move forward or take preventative or corrective action means keeping a close eye on financial data. While a computerized financial management system can be advantageous for strategic planning, the information that it generates is helpful only if the key elements of financial information are continually evaluated and acted upon.

Profit Margins

Generating profits year after year requires a lot of savvy on the part of the owner/manager. Whether you have healthy profit margins or operate in a highly competitive sector with thin margins, you need to monitor your profit margins closely on a monthly or more frequent basis. When profits go up or down, investigate the reasons and make adjustments in your strategies.

Inventory also needs to be monitored regularly. Overseeing inventory levels on a weekly basis will help you determine when you need to reorder fast-selling items, curtail the buyer’s orders of slow ones, or take measures to sell off excess stock quickly. When funds are tied up in supplies or products that languish on the shelf, a cash flow shortage can lead to slowdowns in sales when funds are not readily available for advertising, promotion, and sales incentives to move the more profitable inventory.

Categorizations

In today’s highly competitive market, companies often sell with the thinnest of profit margins. If management does not manage the financial aspects of business as well as it manages the business itself, the business can fail. In such an environment, it is paramount that the owner/manager works with information that is appropriately categorized. Appropriate categorization of costs amongst Cost of Goods Sold, Sales, and Administration expenses is not as Simple as it may seem. Each business may have a somewhat different approach; however, the impact of incorrect allocations can prove disastrous for any business if the cost of manufacturing varies but the seller cannot adjust the selling price because the cost of manufacturing or purchasing is hidden in an administrative category.

It is important to ensure that a sufficient breakdown of information between the various product lines is instituted early in the financial management process so you can pinpoint losses in product lines. Lumping all costs and sales into one category does not provide an opportunity to reduce costs or discard the less profitable items.

Cash flow, capital and profit budgets are usually based upon units of measurement, whether they are vehicles, skirts or hours. A complete recognition f product lines, development costs and development time is essential not only for accurate forecasting but also for determining the cost of goods sold and financing requirements.

Working Capital

The owner/manager constantly monitors working capital changes in order to meet payroll and accounts payable requirements. However, without a simultaneous review of budgets, you could be making decisions with information that is incomplete. Such decisions can be dangerous if, for instance, you make a capital asset purchase that cripples your cash flow for the following month.

Fixed and Variable Expenses

Generally, owner/managers are forewarned of increases in fixed expenses such as lease payments and can budget appropriately. But variable expenses such as repairs, maintenance, and communications can change quickly and with little or no notice. Monitor variables closely.

Variable expenses are usually dependent upon activity in production. Thus, if the pattern is inconsistent it may mean, for instance, that you need to look more closely at what is going on in the plant. Perhaps too much effort is being directed towards manufacturing a specific line, which may, in fact, not be profitable.

Budgets

Gross margin drops are a true indicator of potential problems. As mentioned earlier, categorizing product lines for both sales and cost of goods sold will help you identify problem areas faster and take corrective action quickly. As budget and actual financial data must have the same categories for both analysis and planning purposes, in essence, you can compare apples to apples.

Actual results should be compared to budgeted results on a regular and timely basis. When actual outperforms budget, you have the opportunity to determine "what is right about the product" and revamp future budgets and strategies. Conversely, if actual does not meet budget expectations, you need to determine the cause, what can be done, and how and where the fix should be implemented.

Careful and regular reviews of your budget ensure that you make decisions within the context of the complete picture. If information is incomplete or skewed, the danger is that you could make the wrong decision. It’s also not the most effective use of resources.

Strategic Planning

Keep an eye on your overall strategic plan. A strategic plan that is regularly assessed and revamped in view of the company’s current financial position, market conditions and trends can help you plan more effectively for improved technology, expansion into new markets, and increased marketing efforts.

Talk to your accountant about how you can maximize your financial reporting systems to generate the information that can help you take full advantage of new business opportunities.