What is simple to implement can make such an impact on you and your business.
Reaching the mid part of the year becomes a time to look back and recognise how far you have come.
Have you hit your financial targets or has the disruption knocked you off your stride?
In this article, I will highlight some simple practices that you might have neglected or just not come round to doing.
Each is intended to improve the performance of your business by improving your information and ultimately improving your decision making.
Let me share six habits that you can start to focus on.
1. Comparatives
Numbers are meaningless without something to compare them against.
If I told you a company invoiced £10,000 last month. Is that good or bad?
If I told you they only invoiced £8,000 the previous month (a comparative), suddenly the £10,000 at least has some relativity.
Having a second set of numbers to compare your performance against is mandatory if you wish to adapt your decisions and direction based on results.
The best comparatives are your Budget and your Forecast.
If you have not created a Budget and/or a Forecast P&L for your monthly performance, then this must be your first port of call, simply to enable you to compare your actual performance.
You can read more about planning from this article, click here.
Following on from the £10k revenue this month and £8k last month analogy – if next, I told you that their fixed monthly overheads were £12,000 per month, suddenly both months are a disaster. Which brings me nicely to suggestion number two (below).
2. Know Your Breakeven Point
Knowing your Monthly Breakeven point is a simple method for assessing performance.
I would recommend you take an average of the last three months.
So, simply add up all Overheads for the past three months, and divide by three. Do not include any Variable Direct Costs or Cost of Sales.
And that is it!
This is now the minimum Turnover (or possibly Gross Profit if you have associated Costs directly relating to Sales) you need, to break even.
3. Combining The Above Two Points
Here is another piece of advice to help you.
A simple graph I present to many clients includes both Revenue, Gross Profit, and Overheads as follows:
This is effectively the same as showing the Operating Profit (or EBITDA) figure but reveals more of the story.
If you want to improve upon this graph, add your Forecast figures for the next three or six months.
How does it look now?
4. Keep An Eye On Your Liquidity
Cashflow, Cashflow, Cashflow. Yes I know, you probably are already doing this.
If you haven’t enough time though, here is a quick method of understanding where you are and what you have got to receive.
It is called the Current Ratio, and again, another KPI that I keep clients updated on. This is so important.
The ratio is based on the Balance Sheet. This is made up of five items:
• Fixed Assets (assets which will last longer than one year)
• Current Assets (assets which will last less than one year)
• Current Liabilities (liabilities which need to be paid in less than one year)
• Long-Term Liabilities (liabilities which need to be paid in over one year)
• Equity – Assets less Liabilities, above. This is the Net Value of the business (although do not be confused here with its real value)
The quick calculation here is to divide Current Assets (most likely made up of your cash in Bank plus what you are owed from customers) by Current Liabilities (probably made up of who you owe, including suppliers, employees, and HMRC in PAYE and VAT, et cetera):
If your Current Ratio is above one, this is great. This means you have enough money in either cash or what you are owed, to meet current obligations.
A number less than one is not tragic but probably does put more pressure on meeting your sales targets each month and keeping your costs down.
5. Working Capital Cycle
If you seem to make a profit month on month, but continue to struggle with actual cash in the bank, then you should look at your Working Capital Cycle (or cash conversion cycle).
This ratio calculates the number of days it takes between, paying a supplier for goods, storing the goods in inventory, and receiving the actual cash from your customer for the goods.
The Working Capital Cycle is important to companies who buy materials but then again, they’re the companies who are struggling with their cash the most, right!
6. Reserve Time For Decisions On The Numbers, Not Just Review Them
If you do want to base decisions on your actual performance, take the time to discuss what the numbers mean, why you’re hitting these numbers, and what you need to do to maintain or improve them.
Too often, meetings transform into drilling down and confirming the numbers, without confirming any actions.
Hold a pre-meeting to ensure accuracy if that is needed, before a second meeting to discuss how recent strategies have performed through their results.
Let’s Wrap Up
Every action I have highlighted is intended to improve the assessment of your business performance.
Embedding these simple to-do’s within your monthly performance check will help make sounder decisions.
What starts as something that you might not have dedicated too much time to before, can become critical to your growth and success. Everything highlighted is intended to provide a simple framework that does not become a drain on your time and efforts.
Good luck and let me know how you are getting on.
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The right Virtual Finance Director is as committed to your business as a full-timer, but without the overhead.
I’m Chris, and I help business leaders clarify, simplify and improve the financial performance of their business. Maybe I can help you too?
