Good Financial Management Leads to Increased Sales & Profitability
Approximately 2,500 business owners came to the Florida SBDC at USF in 2013 looking to take advantage of our no-cost business consulting. The most requested consulting service was for assistance in growing their companies. The second most popular request was for assistance in managing the financial performance of their business.
In spite of the need for the business owner to effectively manage the financial performance of the business in order grow while improving the profitability of their firms, few business owners spend the time to even monitor their companies financial performance on at least a monthly basis, as evidenced by a survey of some of our long-term clients. This survey indicated that only about 20% of business owners reviewed their financial performance on at least a monthly basis.
According to Jim Parrish, Growth Acceleration Services Consultant with the Florida SBDC at USF, “This indicates that the majority of business owners are too focused on growing sales with too little regard to the profitability of those sales or the profitability of the company’s specific divisions, projects, products, or services.“
Parrish lists four reasons given by owners for why they do not review their company’s financial performance:
- They don’t understand what the financials are telling them.
- They don’t have time to review all the available financial information in detail.
- They think they only need to track cash. Everything else will take care of itself.
- They feel they only need to look at sales and profits.
According to Parrish, “Monitoring the financial performance of a company’s specific divisions, projects, products, or services does not need to be a complicated, time-consuming process. Instead of reviewing the details of the financial statements, the company can set-up a few Excel Charts on a monthly basis that allow the owner to spot highlights and trends of financial performance at a glance. Then, the owner only needs to dive deeper into the financials when an area of concern arises.”
Parrish’s suggestions for financial items to chart on a monthly basis (show current month and previous months during the year) are:
- Sales, Gross Profits, and Gross Profit Margin by Division, major Projects, major Product Lines, major Service Categories, and for the overall company.
- Sales Salaries and Sales Commissions as a percentage of Sales.
- Operating Expenses minus Administrative & Officer Salaries as a percentage of Sales.
According to Parrish, there are four significant advantages of using charts to track financial performance:
- Charts are easily to understand due to the graphic representation of this financial information.
- Charts save the owner time. Because these charts can be prepared by a bookkeeper extracting data from the monthly financial statements, the owner could review the significant financial information in as little as five minutes per month. Thereby, leaving time to focus on the owner’s other duties or to “dive deeper” into the financial performance only in those areas of concern.
- Although tracking cash is important, it also can be very misleading. Sometimes, companies have a lot of cash and make expenditures that they cannot afford when future bills start coming in.
- Looking at sales and profits only tell you about the overall financial performance. It doesn’t tell you were your sales and profits are coming from. It may hide the poor or exceptional financial performance of various divisions, projects, products, and services. Plus, it provides the owner with no insight as to where they should focus the efforts to grow sales and/or improve profitability.
Should you need assistance with establishing financial performance metrics and/or charts to track financial performance in order to focus your growth efforts while improving the financial performance of your business, please contact the Florida SBDC at USF for no-cost assistance.