In order to assess the performance of your business, there are many critical questions that need to be answered. Is the business running smoothly? Is it successful, or is it failing? What part of the operations setup acts as bottlenecks, and what parts are acting as growth drivers?
The answers to all these questions lie in regular financial monitoring of the business. Without adequate profits, a regular flow of cash, and strong sales numbers, no business can be successful. That is why the business owner or senior management should ask for regular reports from the organization’s accountants in all these areas.
The basic reports that every company needs to produce are the balance sheet and the profit/loss statement. They are not only vital indicators of the performance of the business but they are also required statutorily. They give an overview of the financial health of the business, and in a nutshell, tell the owners everything that they need to know about how their enterprise is faring.
Every month, an aged debtor's trial balance should be prepared, so that the company can keep track of all the customers who owe them money. They can keep track of irregular accounts and follow up diligently with defaulters to get back their money.
There are many businesses that invest heavily in machinery, equipment, and raw materials. They should maintain accurate inventory records. It will tell them how much stock was purchased, how much was used for making the final products, how much of it went waste, and whether any equipment has gone missing at any point in time. It will tell them if they need to purchase more raw materials and enable them to calculate input/output ratios and stock turnover ratios.
Businesses should ask their finance teams to put together regular working capital statements and periodic calculations of current ratios and quick ratios. This will tell them how many assets they have, as compared to their liabilities, and how many assets they can convert quickly to cash.
Fund flow statements and cash flow statements are vital reports for a business that tells them just how much liquid cash is coming into the business. There are many receivables that are marked as revenues in the balance sheet, but on closer examination, they reveal that they are some way off from being converted into hard currency, and a business can only run with proper earnings, not notional ones.
Merely preparing financial statements is not enough. The business needs to go beyond that and look for hidden messages in the numbers that point out weak areas. Check the overhead expenses, like rent, salaries, marketing expenses etc. Are they under control, or are they bringing down the overall profitability of the company?
How much money is being spent on advertising? Do the returns justify the expense, or is it merely an unwanted cost for the company? How much money is being spent on other marketing avenues, and how many leads are being converted into proper sales? These questions need to be answered to assess the financial performance of the business.
Human resources-related activities should also be monitored. What is the employee turnover rate? If the employee turnover ratio is very high, then the company could be spending a lot of money on new recruitments, payments to recruitment agencies, and separation processes of departing employees. The cost of training new employees and making them capable can sometimes be a burden on the company.
It is also vital that the finance team prepares daily, weekly, monthly and yearly dashboards to keep all stakeholders informed on the financial progress of the company. Trend analysis should be done regularly. How are the financial indicators faring as compared to last month or last quarter? What are the factors that have played a role in their increase or decrease?
Financial indicators of the company should be compared with those of competitors so that they know how they are faring. Maybe their competitors are able to control costs and increase revenues in ways that this business had not thought of yet. And if that is the case, then they need to learn quickly and catch up with the rest of the industry.
In conclusion, monitoring of financial performance plays an important role in ensuring that strategic decisions are taken on a timely basis and the growth plan of the business is adhered to. Accurate financial reporting and financial analysis have a significant contribution in this monitoring activity and hence, should be given sufficient attention by the enterprise.