How to Spot These 6 Financial Warning Signs and What They Mean

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If you read the headlines of national and local news, it is amazing that so many businesses are seemingly strong one day, and the next they are closing or filing for bankruptcy.

One of the many reasons this happens is that business owners and managers don’t pay attention (or don’t want to acknowledge) the financial warning signs that could have saved them. By the time the financial collapse starts, it’s often too late to change course.

6 Warning Signs You Can Look For

To help you spot these warning signs, here are the 6 financial red flags that we coach our clients to take action against:

  1. [The Most Telling Sign] Cash Holdings and Equity Are Lower Compared to the Previous Periods
    Take a look at your balance sheet and income statement to determine your overall cash holdings and equity (Assets-Liabilities). If your liabilities are higher, ask why.  Negotiate terms to lower credit rates, extend payment terms, etc. Involve other departments to determine how your business can operate more efficiently and cost-effectively. Discuss simple ways to increase revenue without significantly increasing overhead.
  2. Days in Accounts Receivable Increasing
    Many customers are pushing the envelope with their payment terms. Create a process for collecting outstanding receivables, and ratchet it up when customers start paying late. Customers often pay those vendors with strong systems, and delay payment to those suppliers who don’t have solid collections practices. This doesn’t mean that you won’t work with a long-standing customer who asks you for some flexibility. It does mean that you implement smart AR strategies such as late payment fees, outsourced collections help and credit reporting with clear communication and consistency.
  3. Not Enough Cash Flow for Accounts Payable
    Order in smaller quantities of goods/services from your suppliers. Talk to vendors to negotiate extended terms, leveraging your long-standing relationship and good business practices.  Use a credit card with 60-day terms to maximize the number of days to pay (make sure to review your credit card agreement and understand the terms). Search for discounts for paying within terms if your suppliers won’t stretch the terms. These strategies may not impact your cash flow immediately, but they can have an overall impact by improving your bottom line, since you are buying product or services at a lower price. Get a good handle on your inventory, turn rate, spoilage, sales trends, etc. so you actually buy smarter.
  4. Evaluate Profit Margins and Turnover Ratios
    We all know that decreasing profit margins are a bad sign, but they can’t be evaluated alone. Turnover ratios are also an important factor. Remember, mega grocery stores and warehouse clubs have low profit margins, but high turnover ratios that result in adequate net income and, more importantly, reasonable cash flow. The key is to look at both your profit margins and turnover rates together because how they interact will ultimately tell you how much cash has flowed into your bank account.
  5. Indirect Overhead Growing with Increase in Sales
    Take a hard look at operations. Are you running as efficiently as you could be? Are your employees productive or can they take on more responsibilities? There are more costs to adding employees than just salary, benefits and taxes. You have equipment, space, recruiting/training time, etc. for each employee you hire. The goal is to increase sales without increasing your fixed overhead. If you find there is nothing you can do to avoid increasing your fixed costs, you might need to re-evaluate your business strategy to determine how you can raise your profit margins to accommodate for your increase.
  6. Warning Signs Outside Your Business
    Every business should use and review a weekly dashboard that includes many of the warning sign financial metrics listed above: gross profit margin, average daily outstanding AR, inventory turns, days payable outstanding, available line of credit, operating profit margin, etc.  But ultimately, there are other warning signs that may not be on your dashboard.   Below is a story from a business who engaged a trusted advisor for an outside perspective.

 A Real-World Example of Heeding the Warning Signs

“Most people under-emphasize the available line of credit,” says Joe Dresnok, a consultant with Management Horizons. “The perfect storm for a company is a down economy, reduced sales and the inability to reduce overhead. When this happens, a company needs to access their credit lines to get through the tough times, and invest in other avenues to generate revenue.”

But during a slow economy, banks will reduce credit lines. One of Joe’s clients had a $300,000 line of credit, of which they had drawn down 1/3.  Joe and his team recommended the client draw down the rest of the credit line. Within 30 days, the bank came to give the “bad news” that they were reducing the company’s credit line to $100,000. The company was happy to report they had already tapped out all $300,000 of the original credit line. “In essence, they preserved $200,000, which translated to staying power.”  In this case, it was definitely worth the cost of that credit to preserve the line.

Each company has its own specific set of measurements (metrics) to help owners understand what to look out for in their financials. (Here are the 8 essential financial metrics we recommend tracking.)  This will at least give you the chance to prevent your company from embodying a quote from Ernest Hemingway:  When asked how one goes bankrupt, he said “Two ways:  Gradually, and then suddenly.”

Watch for the warning signs!

What’s the Key Number You Rely On Daily?

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by Bernadette Peters

Key performance indicators can tell us how well we are doing in our businesses.  But sometimes waiting for accounting software data entry and reporting can be too late for us to make important adjustments quickly.

Many businesses rely on key numbers they can access quickly each day to give them an idea of how they are really doing financially. It can take some time to figure out what that metric is, however, once you do, you are much more prepared to make smart business decisions on the fly.

Coffee Shop Looks at 3 Sales Categories

A young coffee shop and wine bar owner was tracking daily revenues to determine the appropriate number of staff to schedule on a shift.  An early mistake they made was to staff only on the basis of revenue. They later learned that transactions were much smaller and the volume was much higher in the mornings, requiring more staff. And although revenues were much stronger in the evening, higher transactions and retail wine sales required less manpower. Now they look at three distinct categories of sales: coffee drinks, retail wine and enter orders. They can get this information at any time through their point of sale system, which is updated instantly as transactions occur.

Management is able to understand peak volume times and days by looking at this data over an extended period of time. From this information they can understand how to better staff their operation to ensure high-quality customer service experience.

Strategy Consulting Firm Drills Deeper

A typical strategy consulting firm would normally review income and expenses after services have been completed and billed.  However, one firm in particular reviews several other numbers to determine how well they are doing and what adjustments to make along the way.

Jeff Pruett, CFO at ATPAC Group, previously worked as the CFO of a marketing strategy consulting company.  He indicated that his former consulting company looked not only at revenue per consultant, but they also determined how to maximize a consultant’s 40-hour work week via revenue per full-time equivalent employee company wide. This allowed management to determine the ideal work force size. 

Jeff also reviewed how much of the consulting pool’s time was spent on billable and productive activities as opposed to “bench” time to understand how consultants are utilized and billed. He also reviewed project contribution margins as part of ongoing analysis of an in-process job to see if the job is getting in to trouble prior to its delivery and whether it’s losing margin.

What are Your Key Daily Numbers?

What are the key daily numbers that are essential to making decisions about your business on the fly?Determining what these numbers are in your particular business might require some help from a professional, but once you do, your management team can be much better prepared to make smart proactive business decisions. It may require measuring numerous metrics for a period of time, sometimes even two years or more, before you can figure out which metric or group of metrics are truly predictive for your business.

Need some guidance in determining these metrics? The Numbers Coach is here to help. Contact us today for a complementary review session of your numbers.

Want To Stand On Solid Financial Ground?…Follow These 9 Key Strategies

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Don’t shoot yourself in the financial foot.  Stay clear of common financial mistakes by following these 9 financial concepts.

  • Cash is “king” so keep a handle on your cash by reviewing your cash flow statements, your weekly cash receipts, and weekly or daily cash balance.
  • Understand what would be the right mix of debt vs. equity in your business.  Each business has its own “speed limit” and growing too fast can cause you to pile on debt and thereby, risk to the business.
  • Have a written plan even if it’s a short one page which I prefer.  The lack of a plan is the plan to failure.
  • Know how to read your financial statements, and not just you profit and loss statement but also your balance sheet and cash flow statement.  Otherwise it will be hard for you to make good decisions for the business.
  • Know your costs.  This is especially true to understand at what point of your growth will you need to add more fixed cost to the business in order to go the next level.
  • Keep up good relationships with your bank and vendors.  These are your key stakeholders who can make the difference between success and failure.
  • Missing the “forest” because you are only looking at the “trees”.  You are missing the bigger picture of your business and industry.  Understand the trends and be able to step back from the business to see if you are driving in the right direction.
  • The absence of timely data from operations and finance.  If you are waiting 30 days or more to review this data, its most likely too late for good corrective action and rather you will be more in a reactive mode.
  • Lack of understanding the cause of the results.  Get to know the drivers of your business including your financial drivers.  These metrics will provide insight into the direction you are heading.

Follow these 9 key strategies and you will get the financial results that you want. Here’s to achieving your financial goals!

Mike

Do You Have A Red Flag In Your Business?

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Small emerging growth companies often have limited resources and limited staff performing critical functions in accounting/finance.  Below is a list of tips that might indicate a closer look at your records for accuracy or the opportunity for fraud.

  • A spike in payroll expense without a reasonable explanation
  • Accounts receivable is growing but your sales are flat or down
  • Vendors who are being paid but you are not familiar with them
  • Human Resource records are minimal or non-existent for employee pay changes
  • Expense actual vs. budget shows a variance that is not reasonably explained
  • Prepaid expenses are growing consistently month to month but most expenses are flat or down in your income statement

I read an article recently where the same accountant who posted and deposited customer receipts had embezzled $126,000.  How?

The employee deposited customer checks to their ATM which is not always checked thoroughly the banking system.  The accountant then marked the corresponding invoice as “paid” and used the subsequent checks that came in for newer invoices.  This process could only go on for so long because the accounts receivable would grow from a larger pool of unpaid invoices.  Just as the accountant was about to leave the job, the embezzlement was discovered.

It was discovered by auditors checking on the cycle of a paid invoice; from receipt of check, to posting payment to the invoice, to depositing the check at the bank.  Some invoices shown as “paid” did not have a corresponding deposit.  Getting a copy of the deposited check from the customer revealed a different account number from the company’s account and discovered it was a personal account of the employee.

Here’s to a system of processes and activities that represents the phrase “trust but verify” to help you mitigate any circumstances where the health of your business is compromised!

Mike

What Your Inventory Turnover Ratio Is Telling You

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Bankers who lend to small businesses in manufacturing and distribution often calculate a client’s inventory turnover ratio. “What are the bankers looking for in a ratio?” clients sometimes ask.

First, bankers wonder whether the business is carrying inventory that is disproportionate to its sales. Carrying excess inventory is not a productive use of capital when money is tied up in product that sits on a shelf and incurs warehouse costs.

A second concern for lenders is that inventory not turned over quickly will become obsolete, damaged, or outdated. In any of those circumstances, revaluation of the inventory is necessary and losses must be booked. That’s a concern to lenders.   Also a decreasing turnover rate could indicate a slowing sales and lower profit trend.

Calculating the Ratio

The ratio is only difficult to calculate if a business’s inventory varies significantly throughout the year. Inventory Turnover is calculated as Cost of Goods Sold divided by Average Inventory. The Cost of Goods Sold is always calculated for the Income Statement, so the figure is readily available. Average Inventory may be trickier. For businesses with fairly constant inventory levels, simply add Beginning Inventory to Ending Inventory and divide by two to calculate a simple average.

This simple average doesn’t always work well, however, because many businesses have significantly less inventory at the beginning and end of the year than at other times. The simple average, therefore, uses an artificially low denominator, which tends to overstate the Inventory Turnover Ratio.  So, if monthly inventory figures are available to calculate the average their use will provide a truer Inventory Turnover Ratio:

Using information from the table above, we can calculate Lerner’s Inventory Turnover Ratio for 2012 and 2013. The ratio is determined by dividing Cost of Goods Sold by Average Inventory for each year. For 2012, the calculation is 19,726,396/3,936,307=5.01. For both 2012 and 2013, Lerner turned over its inventory slightly more than five times per year. Bankers interested in Lerner’s Inventory Turnover Ratio would likely compare the Lerner ratio against those of other companies in the same industry. A turnover ratio significantly below those of Lerner’s peer group might cause bankers concern about inventory obsolescence.

Let us know if you would like to see how your ratio stacks up against those of your peers, or to discuss how to improve your ratio.

The Numbers Coach Builds Financial Blueprint for Sustainability Company to Grow

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The Company

Sustainable Investment Group (“SIG”), founded by Charlie Cichetti and Jason Kiefer, provides sustainability services to commercial property owners. SIG provides high quality services for LEED certification with commercial buildings. A LEED certified building ensures the property uses sustainable activities to help protect our environment. SIG offers LEED training, consulting, and engineering services domestically and internationally. SIG has become an industry leader and expert in LEED practices.

Situation

In 2020 the SIG team wanted to enhance their financial management and reporting. They were looking to create a platform to communicate the company’s key performance indicators (“KPIs”) that drive its financial results. In addition, the SIG team wanted a “road map” that could guide them as they made financial decisions impacting strategies for growth.

Solution:  Numbers Coach Leadership and Numbers Navigator Services

The Numbers Coach‘s financial leadership services, led by Mike Iverson, were an ideal fit for developing SIG’s performance metrics. Iverson developed a financial scorecard focusing financial drivers that give the team visibility into the profits and cash flow critical to sustained profitable growth. The scorecard offers an “at a glance” view of results. Using our proprietary software (the Numbers NavigatorR), the Numbers Coach plan provided the road map for the SIG team to see where they were headed with profits and cash flow. The model provides a rolling forecast during the year so that the SIG team could make financial and operational decisions “on the go” to achieve their goals.

Results

Iverson pulled together financial and non-financial data to complete a customized scorecard and financial model. Each month, the Numbers Coach meets with the SIG team to methodically review results and provide the input and analysis from the Numbers NavigatorR software. From the monthly financial coaching meetings, the SIG team can take actions on activities that improve the company’s bottom line results.

For more information on Sustainable Investment Group visit www.sigearth.com

To learn more about Numbers Coach services, click here

“Mike has been an important part of our team.  His understanding of financial processes, cash flow, and how to explain our results gives our team the right tools to navigate our finances successfully and stay focused on our financial goals.”  

– CHARLIE CICHETTI

Numbers Coach Eases the Pain of Financial Management for Medical Practice

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The Company

Pain Care, LLC (formerly Georgia Pain and Spine Care) is a leading pain management medical services firm that provides comprehensive solutions to help restore each patient to their original lifestyle. The company uses progressive approaches to pain management with education, counseling, and minimally invasive procedures. Their mission is to relieve pain, increase productivity, and improve the quality of life for its patients using technologically advanced treatment regimens through its various metro Atlanta offices.

Situation

In 2020, the Pain Care team wanted to enhance their financial management and reporting capabilities. They wanted to create a platform to communicate the company’s key performance indicators (“KPI”) and help educate its key team members on what drives its company’s financial results. In addition, the Pain Care team wanted a “road map” that could guide them as they made financial decisions impacting strategies for growth.

Solution:  Numbers Coach Leadership and Numbers Navigator™ Services

The Numbers Coach (“NC”) financial leadership services were an ideal fit for developing Pain Care’s performance metrics. NC developed a financial scorecard to focus on the financial measurements that drive company profits and cash flow critical to sustained profitable growth. The scorecard offers an “at a glance” view of results. NC developed a financial model from its proprietary software, the Numbers Navigator™ . The software provides a road map for the Pain Care team to see where they are headed with profits and cash flow. The software’s rolling financial forecast provides the Pain Care team with a tool to make critical decisions “on the go” to achieve their desired results.

Results

NC pulled together financial and non-financial data to complete a scorecard and financial model. Each month NC meets with the Pain Care team to methodically review results and provide the input and analysis from NC’s Numbers Navigator™ financial software. From the monthly financial coaching meetings, the Pain Care team can take actions on activities that improve the company’s bottom line results.

For more information on Pain Care, LLC visit www.georgiapaincare.com

To learn more about the Numbers Coach financial leadership services, click here

“Mike has become an important part of our team.  His understanding of financial processes, cash flow, and approach to educating us on our results gives our team the right tools to help us understand how to navigate our finances successfully and stay focused on our financial goals.”  

Dr. Charles Brownlow, Founder / Medical Director

Keep Your Finger on the Pulse of Your Business

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There are plenty of ways to measure the financial success of your business: profit margins and revenue growth, for instance.  But do the old standby measures give you the whole picture? It’s never too early or too late to try out new ways of analyzing the financial health of your business.

I recently came across a 2017 Inc. magazine article written by entrepreneur and author Norm Brodsky. In “Pencil Power” he suggests an assessment method that would have been called “old fashioned” in the past, but today might be termed “retro.”  It involves—brace yourself—a pencil and paper.  (Yep, I’m coming back to the same pencil and paper I mentioned in a blog post a few months ago.)  Brodsky believes that tracking monthly sales and gross margins by hand is especially beneficial to new, or relatively new, business owners.

He says the practice will improve young businesses’ chances of success 100 times over:

“By writing the numbers down and doing the calculations yourself, you begin to have a feel for the relationships between them. Later on, when other people are reporting numbers to you, you’ll be better able to recognize when something’s wrong.”

Brodsky recommends a simple exercise to try at the end of each month: write down sales, cost of goods, gross profit, and gross margin of each product for both the month and year-to-date. Then write down the same information for each customer.  This is a quick way to see where you are saving money and where you aren’t.

If your business is already doing a good job tracking these metrics, there might be others that could shine light on an area that’s erratic or negatively trending. Try writing down monthly inventory holding costs or Accounts Payable and Accounts Receivable totals. Maybe some cash flow metrics need attention.

It’s a painless, 30-minute exercise that just might surprise you by exposing a weak or strong area of your business that’s been hiding in the dark. Add it to your evaluation and decision-making arsenal. I suspect you’ll find it insightful.

Let us know if we can help you track your metrics.

Do You Know Your ROCE?

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How Measuring Your Return on Capital Employed is Critical for Financial Health

There are so many ways to measure a company’s financial success: profit margin, return on equity, and return on invested capital.

Return On Capital Employed (ROCE) is a lesser known but equally important financial indicator. ROCE is especially useful for evaluating your company’s macro level financials or other companies to invest in. It’s essential because it goes beyond simple profit margins to specifically assess how well a company runs, conducts its business, and returns value to investors.

ROCE is the total of a firm’s assets and revenues minus current liabilities. The ROCE ratio is simple:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT)/Capital Employed

The higher the result of the formula, the more efficiently a company is utilizing its capital. If a company’s ROCE has gone up since last year or in the last few years, it indicates a company is going in the right direction. At a minimum, ROCE should exceed the cost of capital (financing costs), or the company can find itself in a bad financial state.

ROCE is especially useful in comparing how different companies in the same industry leverage their capital, particularly in capital-intense industries like energy, auto, and telecommunications that habitually hold a large amount of debt.

Don’t confuse ROCE with ROE (return on equity), even though both are profitability ratios that measure a company’s profitability as related to funds invested. ROE takes profits generated from shareholders’ equity into consideration, as opposed to ROCE, which uses all capital employed including the company’s debt.

ROCE percentage is one of the tools for judging the performance of managers and how effectively they are running a business. It’s a good idea to look at the industry average and the ROCE of competing companies.  The ROCE percentage is one of the few metrics that does allow you to compare across industries and within your industry.

If employed capital is not given in financial statement notes, it can be calculated by subtracting current liabilities from total assets. Watch for poor quality profits, such as the sale of expensive equipment that can’t be repeated regularly, as these can create an artificially high ROCE. Other factors such as leasing versus purchasing equipment can also lead to a slightly higher ROCE.

Despite the value of evaluating a company’s ROCE, it should not be the only factor used for an accurate assessment of financial stability; other probability ratios certainly contribute to the whole picture.  However, knowing your ROCE percentage is important metric for a business owner to keep track.  Your ROCE percentage provides the business owner the return they are getting on their investment in the company.

If you want to learn your ROCE percentage, feel free to reach out to Mike to get a free template at Mike@trilliumfinancial.com.

What Is the Balanced Scorecard? (And Why Should You Care?)

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By Michael Iverson

If a business advisor told you that more than half of the largest U.S. corporations used a particular management tool, chances are pretty good that you would be interested in using it for your business.   The balanced scorecard is, in fact, widely used by America’s largest companies. Editors of the Harvard Business Review named it one of the most influential business ideas of the past 75 years.

The purpose of the balanced scorecard is alignment of strategy with the daily activities of a business.  It was introduced as a performance measurement framework in the 1990s by two business professors — Drs. Robert Kaplan and David Norton. The idea is to augment traditional financial business metrics with strategic, non-financial performance measurements. In combination, the two very different kinds of measurements provide a more balanced view of a company’s performance, especially its progress toward achieving long-term, strategic objectives.

A Change of Focus

The balanced scorecard attempts to address a long-time shortcoming of U.S. businesses – their focus on attainment of quarterly earnings goals, while paying too little attention to building long-term value. By focusing on near-term earnings, which are easily measurable, American businesses often neglect investment in intangibles, the returns of which are more difficult to measure.

Focusing on past events causes companies to under-invest in important areas like product and process innovation, building and retaining employee skills, and improving customer satisfaction levels.  These intangibles contribute significantly to the long-term value of a business.  Companies create future value by investing in customers, suppliers, employees, processes, technology and innovation – the intangibles that matter today.

Companies can only improve management of their intangible assets if they integrate measurement of those intangibles into their management systems. This notion led to development of a management tool for describing, communicating and implementing strategy – the balanced scorecard.

The scorecard envisions a company’s Vision and Strategy at the center of a continuous feedback loop, surrounded by four perspectives, each with its own business metrics. A company collects and analyzes data relative to each perspective.

The Learning & Growth Perspective

Employee training, individual growth and company-wide improvement are hallmarks of great companies. Employees who embrace technological advances and mentoring become more productive. Their collective knowledge significantly enhances the company’s value.

The Business Process Perspective

Managers need to know how well the business is performing based on its internal processes. Are the internal processes allowing the company to produce quality products and services, while achieving incremental improvement? The metrics for this perspective are unique to each business and should be designed by managers who are intimately aware of both internal processes and customer needs.

The Customer Perspective

Perhaps the most important management concept of recent years is the realization that meeting, if not exceeding, customer expectations is a leading indicator of business success. Customers whose expectations are met or exceeded become extremely loyal, building business value. When expectations are not met, customers begin to look for other suppliers.

The Financial Perspective

Traditional financial analysis does provide useful information. Kaplan and Norton suggest that it is most useful when it encompasses risk assessment and cost-benefit measurements, and when it is balanced by data from the other three perspectives.

If you would like help in creating a balanced scorecard for your business, just give us a call at (404) 353-2148 or send us an email, and we will be happy to help!

Metrics: It’s Time to Keep Score in Your Business

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by Tim Fulton

I enjoy playing golf but it can be a very frustrating game.

For that reason, I typically do not keep score when I play golf. I find that it makes the game more enjoyable when I leave the scorecard and the half-pencil in the clubhouse. I have also found that over the past three decades that I have played golf, my game has not improved at all. If anything, it has deteriorated over time. But then it is hard to tell because…I don’t keep score.

When friends ask what I normally shoot when I play golf, I usually respond with: “mid-90’s.” That sounds pretty good and seems about right. The funny thing is that when I do actually keep score, I usually shoot in the high 90’s to low 100’s. In other words, I don’t score as well as I presume I do.

Many small business owners manage their business just like I play golf. They don’t keep score. Their reasoning is very similar to mine as well. They say it just makes running their small enterprise that much more frustrating if they must look at monthly financial statements or weekly sales reports. In addition, since they work in the business every day they “know” how the business is doing. When I ask a business owner questions about profit margins, sales figures, specific ratios; I will either get a blank stare (bad sign) or a rough estimate. Upon examining their financial statements, I usually find that their “rough estimates” are overstated (sometimes dramatically).

I tell small business owners that the question is not whether or not they should be keeping score in their business. What they are operating is not a leisurely walk in the park slapping a silly white ball from tee to green. This is their livelihood. This is their dream. This is their business. . . Instead, I inform them that the key question is what to keep score of? What should they be measuring and monitoring on a regular basis? How can they check the pulse of their business on a day-to-day basis?

My dad was an entrepreneur. He was not the owner of the business but he had to think like an owner. He was in charge of operating a large warehouse distribution center. I can remember being in his office and always seeing a small piece of notepaper (this was before “Post-Its”) in the upper front corner of his desk. On that piece of paper there were three numbers scribbled down. On one occasion I asked my dad what those numbers were. Little did I know at that time that I was about to receive one of the best business management lessons I ever received (in or out of business school).

My dad responded that his bookkeeper brought him this sheet of paper every day with three (3) numbers written on it. The numbers included the past day’s total sales, this day’s bank deposit, and the amount of accounts receivable outstanding that particular day. He explained to me that those three numbers gave him the “pulse” of the business each and every day. This is how he kept score of his business. Through his experience in managing this business, he knew what to look for in these numbers. He knew what was “below-par,” “par,” and “above-par.” He knew when his business “game” was on and when it was off. No guesswork here.

No one day’s number would cause a panic. He was more concerned with patterns. Were sales increasing? Were receivables under control? He had a mental chart of each of these figures and would take action when action was necessary.

In addition to these daily reports, he would also receive weekly sales and inventory reports. He paid close attention to the monthly financial statements when they arrived. However, it was those daily reports that he relied upon most and allowed him to best keep score of his business. They were timely. They were accurate. They were critical to his ability to successfully manage this multi-million dollar operation.

What numbers should you receive every day? You decide. Possibilities include sales figures, bank deposits, inventory levels, employee timesheets, production reports, accounts receivable, accounts payable, and profit margins. Every industry has different areas of performance that need to be looked at regularly.

I think three is the magic number. Pick any three of these numbers and watch them every single working day. That is your mini-report card for the day. That is your scorecard. Set reasonable standards for each figure and be prepared to take action when necessary.

Keep score for your business and watch it improve and grow.

Use Your Dashboard to Monitor Profitability

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by Michael Iverson

Believe it or not, it is possible to manage the financial side of your business in only a few minutes each week. With a good dashboard, you can quickly review the key drivers of the business to know how well you are doing.

Here are some metrics you might want on your dashboard. Let’s consider your Income Statement (aka, Statement of Profit & Loss, or P&L) and four profitability metrics that derive from the Income Statement:

  1. Price
  2. Gross Profit Margin
  3. EBITDA
  4. Net Profit

1.  Is the Price. . . Right?

As consumers, we know that Price represents the specific dollar amount a vendor charges for a given product or service. Business owners tend to think about Price differently. In the context of the Income Statement, Price represents the average dollar amount a business charges customers for a product or service sold during a reporting period (month, quarter, year, etc.). Because it is an average of all products and services sold, it might seem like a statistic that’s not particularly noteworthy. However, the statistic can be used for benchmarking – comparing the average price for the current reporting period against the average price for a prior period, for example.

Price is a variable component of Sales for the period, meaning it’s possible to increase or decrease the price and see the flow-through impact on bottom-line profits. In some instances, a price increase substantially improves the Net Profit of the business. In a price-sensitive environment, a price increase is rejected by some customers and sales volume may actually decline. When Price is a component of your dashboard, a quick glance provides some indication of customers’ price sensitivity for your products and services – which certainly is important for an owner to know because it has important implications for business profitability.

2.  Managing Gross Profit Margin

Gross Profit Margin is one of the most basic measurements of profitability. Sales less Cost of Goods Sold yields Gross Profit. Cost of Goods Sold includes direct costs of production, such as materials and production labor. The Gross Profit Margin is simply Gross Profit (GP) expressed as a percentage of sales. A business with sales of $50 million for the reporting period and a $25 million Cost of Goods Sold (CGS) has a 50 percent Gross Profit Margin (calculated as CGS/GP).

Gross Profit Margin is an important gauge of profitability. If a company does not generate adequate gross profit to cover its other operating costs, then it cannot become profitable. In addition, much like Price, it provides a good benchmark. It is especially useful when compared to other companies in the same industry. If a company’s Gross Profit Margin is significantly lower than those of competitors, the costs of its primary inputs (generally, material and production labor costs) may be too high and the company will have a tough time competing.

3.  EBITDA

EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is a measure of profitability that goes a step beyond Gross Profit. EBITDA includes another layer of costs, which are typically classified as selling and administrative expenses (sometimes referred to as overhead costs). It excludes interest, taxes, depreciation and amortization, which are considered to be non-operating costs. EBITDA is a measure of profitability from operations and plays a role in the valuation of a company. Like most profitability measures, an upward trend over time is desirable.

4.  Net Profit – The Bottom Line

Net Profit is the final line of the Income Statement, hence the alias “The Bottom Line.”  In terms of accounting, regulatory compliance and most debt covenants, Net Profit (or Net Income) is the most complete measure of a company’s financial performance. It includes all the costs subtracted from sales. A growing Net Profit figure over a sustained period of time suggests that a business is managed effectively.

 

A dashboard with these income statement metrics can help you more efficiently manage and make decisions for your business. There can be other factors and income statement metrics that drive your business and we would be glad to discuss which ones make the most sense for you.  Contact us for a no-obligation assessment of your dashboard metrics.