Adaptability in today’s changing economic trends is vital in order for entrepreneurs to properly manage their finances. Unfortunately, many entrepreneurs tend to only look at their financial statements close to the year-end. According to BDC’s financial management consultant, Jorge Henao, this lack of benchmarking will put your business at risk.
Evaluate Your Financial Indicators Monthly
Consistency is key when it comes to monitoring your business’s finances on at least a monthly basis and an even more comprehensive data analysis on a quarterly basis.
Evaluating your company’s finances entails having a long-term strategy and comparing the present-day performance of your business to your goals at the beginning of the year. This is when you can perform necessary adjustments based on the metrics from your KPI. As quoted from Jorge Henao, "You want to make decisions at the right time. If you wait until year end to address issues, it will probably be too late."
Four Crucial Performance Indicators
Development—Monitoring the increase or decrease in sales and profits on a consistent basis. Is your business fully taking advantage of its profits for company’s growth?
Asset Liquidity—Your company’s ability to convert its assets to meet current liabilities.
Leverage—Is the company taking advantage of financing to operate and grow?
Activity—Are you putting your assets to good use? It is very important for companies to regularly keep track of their cash flow. Companies that generate ample profits can still face problems if they don’t have sufficient cash to run daily operations.
Growing businesses need a constant source of funding for receivables, inventory, equipment, and labor. Therefore, it is not advisable to postpone the evaluation until you need the resources as this puts your business in a risky situation. Moreover, it is equally important for entrepreneurs to compare their financial performance against companies in the same industry. This enables you to spot vital areas of improvement and leverages your competitive advantage amongst competitors. For example, below average financial performance implies flawed pricing due to a faulty interpretation of costs and in order to remedy this problem, the company may choose to reduce costs, increase the pricing, or combine the two tactics. It may sometimes be tempting for entrepreneurs to act upon their intuition but being frequently equipped with facts such as monthly financial data can help business owners make the best decisions.
We hope this article helps in helping you effectively monitor your business by discovering areas of improvement and formulating an action plan for a more successful business operations. If you need the help of highly experience accountants in Calgary, companies such as A1 Accounting & Business Solutions and EZTax Calgary offer business planning services for entrepreneurs.
If you like what you’ve read, feel free to give this blog a thumbs up and share us on Facebook.
BDC. (2018). 5 financial indicators every entrepreneur should monitor. Retrieved from bdc.ca: https://www.bdc.ca/en/articles-tools/money-finance/manage-finances/pages/5-key-indicators-monitor.aspx