Performance Management - Employee engagement & management
Business and Financial Performance Management
Business is about results and making the business more profitable and sustainable. Strong business financial performance requires good profitability through healthy sales margins and ongoing sustainability through controlling costs and liquidity.
How do you know if the business is profitable and sustainable?
At a minimum, regular monthly reports of the Income Statement (Profit & Loss account) and Balance Sheet will shed some light on the financial position of the business, providing the reader has the knowledge to interpret them correctly. These reports are readily available through most accounting software packages (eg MYOB, QuickBooks etc.)
However, more useful information on where the business is or is not performing, from a financial point of view, can be gained through a greater depth of analysis of:
- Profits: Gross, Net and Net Operating Profit
- Cash flow cycle
- Actual to budget comparisons
- Work in Progress rate
- Current ratio
- Inventory turnover rate
- Accounts receivable (Debtors) rate
- Accounts payable (Creditors) rate
The correct interpretation of the results of the analysis, (by a qualified management accountant), can determine if an ‘action alert’, (a call to urgent action), is necessary in any particular area(s). Competent regular financial performance measurements provide a ‘scorecard’ for a business. Furthermore, it can identify where the focus of the people in the business needs to be to turn around an area of concern in a timely manner – before it gets out of hand. This is about filling the financial information gaps so that the responsible business person can make more informed business decisions in daily operations. If gross profit, for a simple example, is not up to industry standards or falling below the budgeted figure there can be a number of reasons. One or more of the products/services may be priced too low – not a sufficient profit margin. The direct costs (or cost of goods sold) related to one or more of the products/services may be too high – maybe a change of supplier is needed. Or it may be a combination of these things.
And what about the profit margin at the net profit level on an individual product/service! Can this be determined? Well, yes it can or a least a very good estimate can be made. So it is possible to know which products/services are profitable for the business and more importantly which are not. It may also be necessary to reduce the other costs of the business (those that are incurred regardless of any sales – or indirect costs, such as rent, administration, etc).
To learn more contact us.
