As business owners, we need to be across our profit and loss statements. We need to make a profit to keep our businesses going and growing, and minimise loss so that we can make more profit. Regular monitoring of our profit and loss statements keeps us up to date with where the money is coming in and going out, and it also gives us a good indication of how our businesses are travelling. But is it enough? A profit and loss statement is just one view of how a business is performing, and it provides limited information from which to make plans for the future. So, while monitoring your profit and loss information is important, there are other strategies that can help you find out what is really happening in your business. Financial ratios, key performance indicators (KPIs) and balanced scorecards allow you to drill down into the data of your profit and loss statements, balance sheets and non-financial information, and therefore provide a deeper understanding of your business. Here’s what they are in more detail:
Financial Ratios
Financial ratios (FRs) are relationships determined from your business’s financial information and used for comparison purposes. They will give you more insight into what is really happening in your business and help you identify potential problems. A FR such as Current Ratio (current assets divided by current liabilities) measures your business’s liquidity and is a good indicator of a business’s financial strength. FRs can also identify if your business has improved from one year to the next.
Key Performance Indicators (KPIs)
Measuring KPIs helps you understand your business from top to bottom. A KPI is a metric, or method of measuring your business. To be effective it should be specific, achievable, measurable, understandable—meaning everyone in the business should know what the KPI means—and measure short and long-term business indicators. When setting KPIs, it’s important to be clear about the objectives and strategic decisions of your business. Your VCFO or accountant will be able to help you decide which are the most important KPIs for you. KPI examples include: customer satisfaction, number of customers, and EBITDA (Earning Before Interest, Tax & Depreciation).
Scorecards
A balanced scorecard is a tool that can help to clarify your business’s operational and strategic goals and track your progress towards achieving them. It pulls together both financial and non-financial data into a one-page report. The report not only provides an in-depth view of business performance to better inform business decisions, but it also can reveal business priorities and how a business may best grow and improve.
If all this sounds like hard work, rest assured that it really isn’t. Your financial expert can easily monitor and analyse these measures and explain what the information means for your business. They can also use some outstanding tools to collect the information, track your progress, highlight areas that need attention and forecast future goals. Because these tools are cloud-based, you can also view your reports on any device, at any time. These include:
CrunchBoards collects all your business’s financial data and crunches it into beautifully presented, easy to understand reports. You can use this data together with the App’s online tools to create simple or complex KPIs for operational and retrospective analysis, or model future scenarios to help plan and reach your business goals. For more information on CrunchBoards, check out our August newsletter.
Spotlight Reporting gives you a clear picture of your business. It’s used to measure KPIs, profitability and cash flow, and also provides non-financial analysis to improve business performance and accountability. It highlights trends and identifies issues and opportunities. It doesn’t just offer reporting, either. It can create cash flow forecasts and scenario budgets to look forward and plan for the future.
Adaptive Insights is an award-winning, easy-to-use budgeting, planning, forecasting, consolidation and reporting tool that replaces multiple spreadsheets with an integrated system that consolidates data. Its suite of tools covers sales, budgeting, consolidation, financial modeling and planning.
As always, if you would like more information or have any questions, please post in the comments section or get in touch here.