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The Key Indicators of Financial Health
Ask the right questions, closely examine the answers. If you wake up one morning with a runny nose or an upsetstomach, you know there's a good chance that you'recoming down with a cold. But how do you detect the earlysymptoms that indicate your company's financial health isdeteriorating?Ask the right questions and make sure they get answered.Think about what makes your company profitable, how youcan make it more profitable and the risks to profitability.Then you can develop plans to drive up profitability.Part of that is "forecasting surprises." The business owner should think about the worst-case scenarios: a warehousefull of unsold inventory, receivables that can't be collected,a term loan that comes due, a major piece of machinery thatmust be replaced and so on. Then focus on the possibleeffects on your company — and responses.Look closely at pricing, margins and costs. Can youincrease prices, perhaps by introducing proprietary productsor special services? Is capacity utilized well? Areinvestments in marketing and advertising really paying off?Are salespeople being motivated to sell higher-marginitems? Do production people have the authority to makechanges that will reduce costs?Cash-flow forecasts are critical, yet many business ownersfocus more on profits than on cash. Similarly, they may nottake a strategic approach to debt. Rather than using debt toleverage their growth, they borrow only to handle anunexpected expense.Accounting statements are important, but they are historical.A company's financials tell what was. Planning asks "whatif," and then tries to explore different answers for the best possible outcome.Strategic planning must be tied to an operational plan.Telling employees, "Our margins are too low," doesn't help.Telling them they will receive a bonus for selling ProductA, which has a high margin, rather than low-margin ProductB, will produce results. If it's a manufacturing problem,establish specific quality benchmarks.
Tip:
Identify "key indicators of financial health" that can beeasily tracked, such as margins, sales mix, number of customers, number of days receivables are outstanding andinventory levels. Then let everyone in the company knowthe status of these indicators on a monthly basis. When people understand that their livelihood depends on keepingthese indicators healthy, they will get involved in makingthat happen.
Writer:
Alex Auerbach interviewed Joseph Drago. As a-
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