Further to last week's Blog on How to Enlist the Finance Department to Help Growth your business – this week we are exploring the 3 areas with missing links in respect to financial reporting.
1. The Missing Piece of the Financial Health Check
Typically, most businesses review their financials by the middle of the following month.
If they are really on the ball – these are ready for review by the 5th working day of the month. This review includes financial documents such as Profit & Loss (P&L) Statements, Balance Sheets, and Cash Flow statements.
Preparing a monthly financial package is an essential practice that ensures the business has a clear, updated view of its financial health. The P&L shows the company’s revenues, costs, and profitability over the past month. It also includes the Balance Sheet, which provides a snapshot of the company’s assets, liabilities, and equity, and the Cash Flow statement, which tracks the inflow and outflow of cash.
By compiling and reviewing these documents on a monthly basis, business owners and key decision-makers can stay informed about the company’s performance, identify financial issues early, and make more data-driven decisions. For example, a monthly P&L review might reveal declining margins, prompting an evaluation of cost controls or pricing strategies. Meanwhile, the Cash Flow statement may highlight a potential shortfall in the coming months, leading the business to secure financing or tighten payment collections. Overall, regular preparation of these reports allows the business to be more proactive, maintain financial stability, and execute strategies that support growth.
However, the report that is often missing is the projections. These are not easy to come by as the past is easy to track, but the future is uncertain. But by definition if you do not attempt to predict the future financial state of your business you will be out of date – as the information you are looking at is old. Knowing when the business is making a turn and watching these signs is an art as well as a science so getting a forward-looking view of expected revenue and expenses based on current trends is critical.
2. Missing Weekly Metrics
Establishing key metrics that specifically drive your business growth or profitability with
defined ranges is essential for tracking the performance of key aspects of the business and ensuring that operations stay on target. But many businesses review these infrequently. Having access to these numbers weekly and reviewing them will ensure that there are no surprises in the monthly review.
Metrics such as gross profit margin, customer acquisition costs, accounts receivable turnover, and inventory turnover, provide measurable benchmarks for different areas of the company’s financial and operational health. By setting acceptable ranges for these metrics, business leaders can easily assess whether they are meeting their targets or falling short.
For instance, if a company's gross profit margin falls below the established range, it may indicate a need to reduce costs or adjust pricing strategies to maintain profitability. On the other hand, if metrics like customer retention rates or sales growth exceed expectations, it signals that the company’s strategies are working well, and further investment in those areas may be warranted. Regular monitoring of these metrics within these predefined ranges enables quicker responses to emerging trends, better resource allocation, and more agile decision-making. Ultimately, having clear ranges fosters an environment of accountability and continuous improvement, helping the business remain focused on growth and operational excellence.
These are your own unique quantifiable metrics that track the effectiveness of specific business operations. When analyzed consistently, these metrics provide deep insights into the company’s financial health, operational efficiency, and overall growth trajectory. Let’s explore how an analysis of Key Metrics can provide insight:
High % Cost Items: Evaluating and tracking your most expensive cost centers weekly will make sure there are no surprises when you look at your P&L 4 weeks later. If the costs start to increase, it could indicate ineffective strategies or management. A business might need to negotiate better supplier contracts, reduce operational inefficiencies, or re-evaluate its pricing model.
Accounts Receivable Turnover: A low or declining accounts receivable turnover ratio could suggest that customers are not paying on time, leading to potential cash flow issues. This would be a red flag that the company needs to tighten credit policies or follow up more diligently with customers.
Conversely, an analysis of Key Metrics can also highlight opportunities for growth and expansion. For example:
Sales Growth Rate: A consistent upward trend in the sales growth rate may indicate that there is strong market demand for the company’s products or services. This could be an opportunity to expand into new markets, invest in more sales staff, or develop complementary products.
Customer Lifetime Value (CLV): If CLV is increasing, it suggests that customers are staying loyal and generating more revenue over time. This presents an opportunity to invest further in customer retention strategies, loyalty programs, or upselling efforts to maximize long-term profitability.
Inventory Turnover: A high inventory turnover ratio indicates that products are selling quickly, which might present an opportunity to expand product lines, increase stock levels, or explore more aggressive marketing strategies.
Addressing these signposts in a timely manner is essential for maintaining operational efficiency and ensuring the overall health of the business. When these metrics fall outside the predefined acceptable range—they require immediate action.
By reviewing and addressing these metrics weekly, businesses can make course corrections early enough to influence the current month’s results, rather than waiting until the damage is irreversible or missing a chance for improvement.
3. Financial Issue Resolution
While the systems above can uncover issues and opportunities, often the missing link is the implementation of the action plans as well as holding people accountable for effective completion.
Implementation of action plans often face a variety of challenges, particularly when it comes to holding people accountable for effective completion.
When taking action on financial issues here are some things to consider:
Leave your biases aside. Make sure you are not bringing your preconceptions to the table, as you will interpret data to confirm your perspectives.
Quickly determine who will own the solution to the issue.
Have that person drive the discussion on the resolution.
Ensure that the owner of the issue has authorized resources to solve the problem and clear expectations of what solving the problem looks like.
You can set a timer for 5 minutes to make sure this does not go on for long – or they can finish resolving out of the room.
Determine when the follow up on the action will take place so they become accountable to act in a timely manner.
Addressing these challenges upfront is essential for successful implementation of action plans and for ensuring that people are held accountable in a constructive and effective manner.
Summary:
In summary, effective financial reporting is not just about reviewing past performance through P&L statements, balance sheets, and cash flow reports. It requires addressing the gaps in forward-looking projections, establishing key metrics that are reviewed weekly, and ensuring that financial issues are resolved with accountability.
By incorporating projections, businesses can anticipate trends and make timely decisions. Weekly metrics provide actionable insights into business performance, helping identify issues or opportunities before they escalate. Finally, successful implementation of action plans, with clear roles, communication, and accountability, ensures that financial issues are addressed promptly, fostering sustainable business growth.
If you would like to meet with other like-minded people on business growth topics like this, send me an email: sw@newviewinnovation.com to find out more about the Advance Business Growth Mastermind Group.