Is your company experiencing one or more of the following?
- Inability to grow revenue or profitability beyond a certain point
- Growth in revenue while profits remain flat or decline
- Costs spiraling out of control
- Growth in revenue constrained by limited cash flow
- Surprise at year end when profitability not where it should be
- Limited time to locate the financing you need
If so, you are not alone, we hear this from many businesses, both large and small. Having a good financial management system can help your company grow its revenues while controlling costs and maintaining profitability. It can also help your company obtain the funds it needs, when it needs them and on the best possible terms. Here are a few things you can do to eliminate the challenges listed above:
Establish the Current Financial Condition
Analyze your company’s current financial condition. Identify areas of financial strength and weakness. Compare the company’s current performance to previous years performance, to other competitors in your industry, and to best-in-class in other industries. A solid understanding of the firm’s current financial condition will help determine what things need to be changed in the future to improve performance. It will also help you in developing your financial forecast.
Set up a system of projected financial statements which can be used to analyze the effects of your firm’s operating plan on projected profits or other financial condition indicators. Perform a sensitivity analysis on the financial forecast. At a minimum, look at a best case and worst case scenario of the plan to understand your company’s financial position if things deviate from the base plan or most probable plan. This financial plan will help chart your company’s path to growth and profitability; you need to understand the key levers that significantly influence the financial plan.
This system can also be used to monitor operations after the plan has been put into effect. Rapid awareness of deviations from the original financial plan is essential to a good control system, which in-turn is essential to business success in a changing world.
Determine the specific financial requirements needed to support the company’s five year plan. This includes funds for plant and equipment as well as inventory and receivable buildups, for R&D programs, and for major advertising/marketing campaigns. Forecasting financial requirements is an essential part of any firm’s management process, and the faster the growth rate the more important the financial forecast. Good financial planning is also important, perhaps even more important, for smaller companies. Whereas a firm such as Home Depot, whose stock is traded on the New York Stock Exchange has relatively easy access to capital markets, a smaller firm may find it difficult, or even impossible, to obtain funds unless its management has time to plan for funds acquisition.
Forecast the financing sources to be used over the next five years. This involves estimating the funds that will be generated internally as well as those which must be obtained from external sources. External resource providers should be identified as soon as possible so that their requirements can be clearly understood and managed in a timely manner. Any constraints on the operating plan imposed by financial limitations, which would limit the use of total and or short term debt, should be incorporated into the company’s overall business plan; examples include restrictions on the debt ratio, current ratio and the coverage ratios by a financial resource.
Establish and maintain a system of controls governing the allocation and use of funds within the firm. Essentially, this involves making sure that the basic plan is carried out properly. This system of controls also enables the firm to very quickly determine where it is deviating from its plan throughout the year. With this information, the firm can make the appropriate decisions to course correct before it gets too far off track.
Develop a Feedback Loop
Develop procedures for adjusting the basic plan if the forecast economic conditions upon which the plan was based do not materialize. For example, if the economy turns out to be stronger than was forecasted when the basic plan was drawn up, then these new conditions must be recognized and reflected in higher production budgets, larger marketing quotas, etc. as rapidly as possible
If your company is experiencing financial inefficiencies, an inability to grow revenue or profitability beyond a certain point, growth in revenue while profits remain flat or decline, costs that spiral out of control, growth in revenue constrained by limited cash flow, a surprise at year end when profitability not where it should be, or limited time to locate the financing you need, take control. Take the time necessary to establish a financial management process. This process will help your company grow revenues while controlling its costs and maintaining profitability. It will also help your company get the funds it needs, when it needs them and on the best possible terms.
Please let us know if you have questions concerning financial management systems or any related topics, we can be reached at (480) 980-3977!