Critical Areas Business Owners Should Look At
What do you think is the most vital thing to keep track of for the survivability of your company? Which numbers should you pay attention to, for the expansion of your company further?
Most entrepreneurs commenced their venture since they are really good at what they do, at least that is what they thought. You can relate that easily when you heard many people around you coincidentally have the dream of running a cafe. Unfortunately, majority of them did not do enough research, especially from the business perspective.
In reality, that is somewhat a suicide squat way of doing things. An experienced chef we know had to close down his café and get back to work in another restaurant. His dishes are amazing but that is both a blessing and a curse to him. His mentality was that customers will come naturally as long as he is serving good food.
He was so focused on crafting recipes and never consider the overall strategic position of his business. The absence of marketing did show its power over time and all of a sudden, he did not have sufficient cash to settle his suppliers’ payment and struggling hard to get himself out of the financial distress.
This unfortune situation is absolutely preventable if he had look at the financial status of his company earlier and take the necessary actions. It is worth looking at other successful references to see how he can prevent such disastrous outcome.
Always Be Looking At Your Cashflow
There are instances where companies have been making losses for years and still surviving.
Contrary, what might surprise you is that some companies that make profits can disappear in few months’ time. How can that happen? The short answer is: Cashflow.
Cashflow is the most critical area to focus to ensure the survivability of an organisation. A profitable company can run into serious trouble if it lacks the finance and the creditors can then file a bankruptcy against it when it consistently misses the due payments (Also see Components of Working Capital).
Profit Is The Fuel
As an extension to the above point, why would you think a loss-making company can survive long? Most of the time, the shareholders strive to keep it alive only for the reason of profit, probably future profit in such case.
Profit is the fuel and the fundamental of all businesses for them to be sustainable. So, always keep your eyes on the Profit & Loss Statement’s bottom line: The Net Profit. It is what shows you what is left after expenditures are paid. This is a great starting point for company’s health assessment, but it is certainly not the end.
Regularly review the profit or the trend of the profit is something an entrepreneur should do to know exactly where the business stands at any point of time. At the end of the day, the business will not last long if it does not generate enough profit to feed the staff as well as the entrepreneur.
There are also instances where the businesses are growing but what is left for the shareholders is lesser than before. This is a typical syndrome of over-trading. When the expenses are increasing at a faster pace than the income (Also see FRS 18: Revenue – Scope and Objectives) does, it is normally not a good sign unless the increase in expenses are only temporary.
You as the business owner can keep an eye on the trend in your costs to prevent falling into such trap. Look at the distribution of the costs and consider the total as well as its pattern over the last 12 months. You will have good grips on your company’s cost structure.
There are times where you need to slow down when the business grow. Too aggressive expansion without cool-down period can cause fragility to the business and just a slight deviation from the financial forecast can destroy the company, in extreme situation.
Debtor Aging Report
Normally, the first thing our accounting firm in Johor Bahru will do when identifying ways to squeeze cash flow is to place focus on the accounts receivable. This is the amount of your overdue billings, and it appears as a line in your Balance Sheet.
The debtor aging report is a report that spells out the list of outstanding debts and how long each of them has fall due. This is a helpful pointer to the business owners for solid actions like: chasing debt from a client that has not been paying promptly, lowering or even cancelling the credit period given to some bad payer. This does not only reduce the credit risk but lower the possibility of making provision of doubtful debt, as a contra account.
These are some critical areas, although not all, you should look at when reading a financial statement. It certainly gives you some tips but to become a more advance analyst, you probably need to spend some years working on various analytical tools or you can just leverage on the expertise possess by the accounting firms (Also see 5 Reasons You Should Outsource Your Accounting Operation).