Business owners make decisions daily, either by using Intuition or Knowledge. In the initial stages of their business, entrepreneurs use Intuition in making those start-up decisions. Then, the practical parts of running a business come from experience, from Knowledge.
To learn as quickly as possible, magazines are thumbed through, books are scanned, emails may be largely ignored. As a result, decisions are made from the gut. How many business owners give their financial reports that same indifferent stare?
Your business is built on data. Are you making use of your available tools to make the right decisions? You need to know in detail how your company runs.
Your financial statements are packed with information. Are you only looking at Sales, Gross Margin and Net Income? You need to know more to make the decisions to grow your business.
- Examine the numbers behind your sales numbers. Examination of the numbers is more than just looking to see what the number is. You need to understand how it is changing, and use that as a basis for digging deeper to find the root causes of the change. Without understanding how the numbers are changing, you can’t improve your company’s performance.
- Does a trend in sales over the past few years indicate a market change?
- Examine sales by product.
- Is there seasonality?
- Does a sales downturn foretell obsolescence?
2. Look at your inventory details. Many entrepreneurs don’t take a hard look at their inventory. When inventory starts to get old and isn’t moving, its value and the expectation of future sales drops dramatically. That affects not only what the bank will loan you on that asset, but maybe even your chances of selling it at all. Understand what is happening with every product you sell, and how it’s affected by your competition and the market.
- What are your inventory turns?
- Does one class of product turn faster than others?
- Have your margins changed significantly?
3.Analyze your payroll detail. Develop some metrics that show whether your payroll dollars are being used effectively to grow your business. Sometimes companies add staff in anticipation of growth. If the growth doesn’t happen, they need to prepare to adjust their staff size.
- What is payroll as a percentage of sales?
- What are your sales per employee?
- Calculate your warehouse or production payroll against orders shipped, or value of goods produced.
- Calculate your administrative payroll against total sales.
4. Examine customer-based reports. This is the basis of how your company operates. Your sales come from your customers. Who are your top 20 customers, and what is their percentage of sales and how has that changed from last year? You need to understand what they are buying, when they are buying it. Is their business cyclic? Are they paying your invoices on a timely basis?
- Which customers are paying invoices slowly?
- Are customers changing their product mix?
- Is your customer concentration changing?
5. Review detailed vendor reports. How you spend your money is just as important as how you receive your money. If you concentrate your purchases to a smaller group of vendors, that gives you more buying power with each of them and the chance of better negotiations with your suppliers.
- What vendors are responsible for most of your costs? Can you negotiate a lower price?
- Do you choose local vendors to reduce shipping costs?
- Are you paying your vendors too quickly? Beware of cash flow impact.
6. Explore your operating cost detail. Have you spent money in anticipation of increasing sales, or the introduction of a new product line? Do you have long term commitments that you need to reexamine? Are you becoming more efficient in the use of the back office? Are you effectively using your computer system to gain efficiency in your company?
- What is the cost of operating your warehouse/office?
- Can you reduce your insurance expense?
- How has technology impacted your business? Have you kept pace?
- Can you negotiate a larger discount with your freight company?
All this information is in your financial reports. If it’s not, it should be. You need to not only look at the basic reports, Income Statement and Balance Sheet, but the detail behind it. Those subsidiary reports contain more detail on your company. Important detail you need to make decisions that will impact on your profitability. Information is the key to securing stable growth for any business. If these numbers aren’t available for you, a skilled CFO can help you get the information you need to grow your business.