One of the most common mistakes a business owner can make is fail to look at their company’s financial health to make strategic decision when looking at expansion or long-term planning. Many times, they make a decision to increase capacity, inventory, headcount or expenses because it “feels” right, seems like a good idea or the Sales group is telling them they must if they want an order.
By analyzing and understanding your financial data, you can gain valuable insights and make informed choices that drive growth and stability.
Here’s how:
Assessing Financial Health:
• Start by diving into the key financial statements:
- Balance Sheet: This provides a snapshot of your assets, liabilities, and net worth at a specific time, revealing your financial position and potential future risks. It can tell you quickly your current debt load and how you are paying for it.
- Income Statement: This shows your revenue, expenses, and net income over a period, highlighting your profitability and efficiency.You should look at creating a P&L forecast over a 3-year period based on what you know and see. If you are looking at an investment in your business, model it out and see if the revenue and costs make sense.
- Cash Flow Statement: This reveals how cash is generated and used in your business, helping you understand your liquidity and potential for further investments. You should have a recurring 13- or 20-week model but you could take it out over a year or two. High level look, of course.
• Ratio Analysis: Calculate key ratios such as profitability ratios (e.g., net profit margin), liquidity ratios (e.g., current ratio), and solvency ratios (e.g., debt-to-equity ratio). These ratios benchmark your performance against and can tell you if the investment makes sense if you pull the trigger.
• Trend Analysis: Track financial data over time to identify trends in revenue, expenses, profitability, and other key metrics. This helps you understand where your business is heading and predict future performance. Lok at a 3/12and a 12/12 to give you insight on the future by looking at the past.
Making Strategic Decisions Based on Financial Health:
• Growth Strategies: If your profitability and cash flow are strong, you can consider reinvesting in expansion, new product development, or acquisitions.
• Cost-Cutting Measures: If you’re facing challenges with profitability or liquidity, analyzing financial data can pinpoint areas for cost reduction, operational efficiency improvements, and resource optimization. This can tell you if you need to wait or, possibly, do something now to change the course.
• Investment Decisions: Understanding your financial health helps you make informed decisions about allocating resources to new projects, ventures, or technologies. This is crucial – if you spend it, what is your “payback”. Understand when the investment is paid and the full financial rewards are in your pocket.
• Risk Management: Analyzing financial data can reveal potential risks such as high debt levels, declining sales, or dependence on specific markets. You can then develop strategies to mitigate these risks and protect your business.
Remember:
• Context is key: Financial analysis should be considered alongside market conditions, industry trends, and competitive landscape.
• Seek professional advice: CFO, COO or your tax advisor. Fractional COO and CFO can help as they most likely have been there!
• Monitor and adapt: Regularly review your financial health and adjust your strategies accordingly to stay ahead of the curve.
By leveraging your company’s financial health insights, you can make strategic decisions that drive sustainable growth, enhance profitability, and secure your business’s future.
This post was done by David Baughman, with Fractional Executive Solutions. David Baughman is the consummate Operating professional, who has brought P&L leadership experience to a broad range of sectors, stages of growth, and business environments. His experience includes aerospace, automotive, industrial, and oil & gas. In every engagement, David has dramatically, and profitably accelerated the company’s growth through his deep grasp of all functions and leverage points. Equity participants see virtually immediate acceleration of the topline, gross margin improvement, and EBITDA margin gains. Those quantifiable measures are his keys to unlocking shareholder value. Follow him on LinkedIn here.
Fractional Executive Solutions provides the experience and knowledge of a high powered operations professional for a fraction of the cost. They provide “been there, done that” security for you and your business. They know what to do and what not to do and we’ll help you strategically accelerate your business.