| Three
Tools for Understanding and Improving Financial Results
There
are three basic, interrelated financial tools that can be
of great assistance to business owners as they review their
monthly or quarterly financial results. But a surprisingly
small number of business managers use these tools on a consistent
basis.
Budgeting,
cash forecast/planning and a robust costing system are interwoven
financial tools that can provide great help in interpreting
(and improving) the numerical results. Without these tools,
it’s almost impossible to determine the best course
of corrective action when the financial results fall short
of expectations.
Over
the next three issues of Wholesale Distribution Insight,
we will look at the benefits of each of the financial tools
listed below. We’ll review the role each can play
in improving your financial controls, examine the benefits
of using these tools and provide some tips for how to determine
if the practices you’re using are actually yielding
the benefits you need.
Departmental
Budgets
Used to allocate resources within your company, this tool
is key to understanding who used resources and when. Typically
integrated into your financial systems, these applications
seldom receive the focus they deserve. Most business owners
agree that the primary benefits of budgeting hit the company
on two different occasions. First, each departmental manager
understands the level of expenditures they are allowed to
make for the entire year. Second, when the company hits
its sales goals and profits fall short due to either overspending
or poorly timed expenditures, management has the tools to
show the department/manager why. Some departmental managers
don’t understand that an authorized expenditure made
too early or too late can be as damaging as overspending.
Cash
Flows/Forecasts
Accurate cash forecasts will allow you to have a clear idea
of periods when your business may need additional funding
and the levels of cash you will need. If sales and collections
slow, will you still have the cash needed for that new piece
of machinery? If a large potential customer tells you they
will use you as a single source, but in exchange they will
only pay in 75 to 90 days, can you make the deal work?
Your
company is judged on the levels of cash required throughout
the year. Higher cash demands can translate to higher risks
and higher interest rates. Developing and maintaining an
accurate cash forecast will lower your company’s financial
risk and help save you money.
Profit
Analysis
For companies to be profitable, products and processes must
be profitable. Having a truthful assessment of margins is
sometimes ignored when changes are made to suppliers or
as specific value-added processes take place. Changes to
internal processes or packaging affect costs, which naturally
changes profit levels. As indirect expenses become a larger
percentage of overall costs, all companies need to examine
the methods used to develop and allocate overhead pools
to make sure they make sense.
Keep
in mind that when supply chain partners focus on “streamlining”
their vendor base, they will typically look for justification
of costs. Companies claiming their internal costs are “confidential,”
are often perceived as companies that don’t know their
costs. As a result, these companies are at a competitive
disadvantage.
Over
the next few issues we will provide some clear and practical
guidelines on how to use these tools to manage future success.
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