Part of the coaching that I do is working with entrepreneurs (a dedicated and delightful bunch by the way).
I love this work.
Although I am a CA myself, I only have recently started studying entrepreneurship. Financial information, its preparation and timely presentation is part of the curriculum.
I don’t want to minimize my skills or my experience but I have learnt that simplicity rules the day.
Furthermore simplicity is not as simple as it first appears. It is developed and tempered through years of doing things the hard way until, finally you have this ‘Eureka’ moment – you see that it’s not that complicated. Difficult maybe, but complicated, no. And, unexpectedly you find that the difficulty lies in maintaining the discipline rather than the algorithms and formulas that create the detail.
When I hear financial ratios things like current ratio, acid test, equity ratio, debt/equity ratio, RONA, ROFE all come to mind.
All these, to some degree, can be manipulated and are historically based. In other words they are all only measurable when the financials are completed.
But the one ratio that sticks solid is the Gross Profit (GP) ratio.
If you structure your reporting system to give a daily GP%, by division and by product type and even by customer, you have the finest financial management tool available.
Turnover is vanity! GP is the bottom line!
Meeting sales targets is one thing but, if the GP is not there, you are fooling yourself!
Managing GP, allows you to take immediate action. Waiting for the financials to be completed is leaving it too late.
In addition, if you manage your GP daily, you can assess your break even point quickly (as it is normally quite easy to ascertain the monthly fixed costs). You can see exactly at which point in the month break even has occurred and, with a reasonable level of accuracy, determine the expected net profit.
Workable and effective? Undoubtedly!
…………………Then comes the next major business tool – the projected cash flow!
You need to know when that expected net profit turns into cash!