Financial intelligence can be defined as the gathering of information about the financial affairs of a business to better understand its nature and capabilities and predict its potential. Its value lies in choosing how to act in a certain economic climate rather than simply reacting to it.
Common reactions to today's economic climate include "the ostrich" approach - if I don't see it, it's not a problem and I hope the finances will work out - and the "cut all costs" approach.
Common actions of those who choose to act (rather than react) include:
- Monitor your business status regularly. As a minimum be reviewing every month a profit & loss and balance sheet
- Review and choose actions based on this better picture
- Engage other parties in the decision making process to avoid the effects of being too close to the business
- Consciously choose the actions that improve profitability rather than just increase sales or cut costs.
Our recently completed Business Benchmarking Survey highlights that the businesses currently doing well in these economic times review and measure their financial performance regularly, engage other appropriate people in the critical decision making and make regular course corrections.
I highly recommend you read the full report
As your business financial intelligence increases, so does the understanding of the effect of your decisions on your business and your personal finances. For example, planning for refinancing or increasing financing (whether for business or personal) begins with knowing how a lender will interpret your profit statement and financial position. In these times, a profit & loss statement showing reduced profit often creates lending nervousness and may seriously affect both business and personal refinancing capabilities.
In changing business strategies, be careful what you wish for. Many businesses see increasing sales as the panacea to economic ills but an increase in sales doesn’t always result in an increase in profits.
An example of this is a business which chose to increase their market share by adding commercial sales to their existing retail sales market. While they increased their sales, their gross margin went down and their costs increased to service the new market (labour and other overhead costs). As a result their net profit decreased.
|
Before commercial sales |
After commercial sales |
Sales |
4,000,000 |
6,000,000 |
Gross Profit |
1,200,000 |
1,500,000 |
Gross Margin |
30% |
25% |
Expenses (excluding bad debts) |
700,000 |
950,000 |
Bad debts |
0 |
100,000 |
Net Profit |
500,000 |
450,000 |
In addition they put themselves in the risky position of increasing their average debt size. So when debts relating to the commercial sales did go bad, they were significantly greater than the average retail customer.
The financial strength of a business therefore rests in its ability to produce prompt and accurate financial statements, frequently measure those results against the budget, engage an appropriate team and make necessary course corrections. This also ensures the business is ready for the improvements in the economy.
If you would like assistance to review your business’ financial information, I invite you to register your interest for a complimentary review by one of Azure Group’s experienced CFOs.
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