It is very important to monitor a wide range of 'performance indicators' in your business, in order to ensure that appropriate and timely decisions and plans can be made. Given that sales, profit margins and cash flow are the lifeblood of any business, owners should place particular emphasis on receiving regular reports on these areas of the business.
Knowing the financial position becomes even more important as the business grows, especially if your plan is to grow the business substantially. Lack of a precise and timely knowledge of the current financial position can lead to business failure and have other consequences for the directors/owners.
The minimum financial information for any business should be periodic financial statements consisting of at least a balance sheet and profit and loss statement.
Businesses that provide credit to customers also need to control their debtors through monthly aged debtors trial balances. Those who have a significant investment in stock should control that through perpetual inventory records. Regular debtor and inventory reports will help prevent too much capital being tied up in these areas and allows for prompt follow up action. For example, changing inventory ordering patterns and allowing immediate follow up on debtors to prevent bad debts.
One disadvantage of financial statements is that they show the results of the business after the event and as such they are a lag indicator.
If prepared solely on an annual basis (and often this happens well after the end of the year) there is a considerable lag. More frequent reporting periods are needed for more important data as well as use made of other financial and non-financial indicators. Examples are number of enquiries, number of customers per day, average sales value, number of quoted jobs lost, customer satisfaction and so on.
Thus for best results, financial statements and other key performance indicators (KPIs) should be prepared on a regular and consistent basis and compared with prior periods. Monitoring performance using successive monthly or quarterly accounts can show trends that otherwise might not be apparent.
The following are some important KPIs that should be monitored:
Business owners should also prepare monthly profit and loss budgets for at least a 12-month period and more importantly to assess the impact that these projections have on the future cash flow of the business. Budgets should be compared to actual results and variances acted upon on a timely basis.
For more accurate reporting, particularly in respect of manufacturers, wholesalers and retailers, it is preferable that the profit and loss and cash flow budgets are linked and have a number of in-built features including:
The profit and loss budget should have columns that separate income and expenses that include GST or have no GST. Note the amounts in the profit and loss budget are recorded on a GST-exclusive basis, whereas on the cash flow budget, they appear on a GST-inclusive basis.
The cash flow budget should automatically calculate GST owed to the ATO depending on whether the business is using either monthly or quarterly GST reporting and whether GST is paid on either a cash or accruals basis.
It is common for operating expenses on the profit and loss budget to be amortised evenly during the 12-month period and the cash flow budget records these payments on either a monthly or quarterly basis. For example rates and taxes, insurance, light and power, and fringe benefits tax are usually paid quarterly, whilst all other operating expenses are usually paid monthly.
By entering an interest rate, the profit and loss budget should have the facility to calculate interest paid each month on the overdraft, or interest received where the account is in credit at the end of the month.
Opening balances (for example, bank overdraft/credit balance, GST liability/refund, debtors and creditors) need to be recorded on the cash flow budget.
The collection and payment percentage rates for debtors and creditors (for example, current, 30 days, etc.) should be recorded to better reflect the impact of sales and purchases on the cash flow budget.
The cash flow budget should include common items such as PAYG instalments/income tax, loan repayments, plant & equipment purchases, dividends, and loans made to the business.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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