Monitoring financial statements is an ideal way to assess your progress toward achieving business goals and identifying ways to modify your planning.
Each business milestone should trigger adjustments that will keep your business growing and thriving. At each stage of development, you must know what to expect. A review of your financial statements will show whether operational changes have achieved the desired effects.
For new businesses in particular expenses soon rise as they acquire more customers. This is the phase where many companies stumble. Rising sales trigger increased cash outlays; the eventual result is a severe cash shortage, as too much money is tied up in inventory, new equipment, additional office space and staff.
Avoiding inefficiencies as you grow is crucial in the early stage. Monitoring inventory levels and average time to collect your invoices are vital uses of financial statements. Now is the time to make sure that you keep a tight rein on operations. Stay in the race by averting a cash crisis.
After gradual advances in sales and profit, businesses need to stop acting like start-ups. If you’ve recently reached this point, you’ve discovered that having everyone doing everything no longer works. So you build a real organization structure. The trade-off is that new costs can easily get out of hand. You face pressure to increase revenue to cover the extra expenses.
This is a time for measuring revenue per employee. A steady rise in that figure substantiates the new layers of expenditure. Measuring return on assets is useful for industries requiring additional equipment. If employee productivity is slipping, ask workers what they could use to improve output. In a surprisingly large number of cases, the culprit is something as simple as ineffective automated systems. Cheap and easy solutions are often found in technology that improves computer speed and performance.
In the big leagues
As the business grows to unprecedented levels, you may start to lose touch with the front line. To close this knowledge gap, you should hire additional high-level officers. They’ll comprise an operational structure that advises you on new initiatives required to better reach your market.
Typical examples are opening new store locations, adding new warehouse space or transportation systems, and offering a different product mix.
At this point, you need sophisticated financial projections to improve your decision-making. Over time, compare actual results to your plans to ensure that you’re meeting expectations. If you’re falling short of intended goals, amend your plan before proceeding further; new projections and revised spending patterns are more likely to give you what you need.
Chances are that management changes improve some elements of business and cause disappointment in others. Because change is constant, monitoring your financial statements permits improvements in the process.
Therefore, businesses of all sizes should possess and use financial data that measures results from every product, department, customer segment and location. That holds the key to ensuring that your business reaches the success you expected from the changes you implemented.