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Go Beyond Your Standard Reports to Manage Your Business

8 August 2008 No Comment

Keeping track of your company’s performance usually means regular review of your financial statements. With a little extra effort there are some other measures you can use that give you a better perspective on performance and let you see and act further into the future.

Reporting vs. Managing
Financial statements show the past; the format is useful for reporting, not managing. Even with real time accounting, the data you are getting show what has already happened; there is no real indication of what is about to happen. Looking at the same data in a different format will provide some insights not available from the standard reports. You should augment your regular reporting with some other tools that will help you proactively drive your company’s growth. You won’t find these tools in basic accounting software; you’ll need to step up to a more powerful package such as Microsoft Dynamics.

Noisy Data
First, look beyond month to month revenue comparisons. There are so many things that affect the numbers any given month that real performance changes get lost in the noise. Seasonality, billing and collection cycles, and the beginning or end of projects can all have a significant impact on how any two consecutive months look. For example, if July and August are always slow and then September always picks up, seeing a sales increase for September is meaningless at best. Even comparing this month to the same month a year ago could be affected by those same factors. Likewise if you collect a large receivable the last day of one month or the first of the next.

To smooth out seasonality and daily fluctuations total the last twelve months of sales figures and update that number each month. Every seasonal or fiscal period is included, and the effect of daily fluctuations is minimized. It’s most useful to look at this on a graph because then you can visually see in an instant if you’re headed in the right direction. When you start, graph two or three years of history to get a sense of how far ahead this technique starts giving signals.

Quality and Quantity
An even finer way to see into the future is to keep track of your quality of profit. All standard financial reports only show the quantity of profit, yet the quality will change in advance of the quantity.

The quality of profit is measured by the ratio of net cash inflow from operations divided by earnings before interest and taxes (EBIT). This indicates the amount of profit received in cash terms during the year. Cash is the fuel that enables your business to survive and gives you the ability to grow. This measure combines cash and operational profit in such a way that you can track your sustainability along with your cash position.

In addition, it filters out extraordinary items and debt so you’re not lulled into thinking that because you have cash in the bank everything’s okay. You may be living on asset sales or your line of credit while the business deteriorates only to have a nasty surprise when it’s too late. Growth consumes capital and especially in a high growth situation you may outgrow your own capital base. Once the growth train picks up a head of steam, being surprised by the cash crunch is more than an inconvenience; you could get completely derailed.

The more accurately you can understand your company’s true performance the better your current decisions will be. Being able to look further into the future will enhance the reliability of your plans and forecasts. Both of these will have a large positive impact on your growth and profitability and both of these can be implemented with minimal extra work.

What To Do Now
Pick one of these and implement it; neither is very complex. The twelve month rolling totals is easiest; a sixth-grader could do the math in twenty minutes. Looking at a few years of data in this format is sure to be illuminating.

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