Most business owners and managers receive annual and monthly financial statements, yet we find financial statement analysis is often overlooked or not carried out on a systematic basis so as to obtain timely insight into the financial performance of the business.
To provide a useful perspective, how much time do you think provincial and national coaches spend on analysing the performances of their sports teams? How many dropped passes or missed tackles in rugby, intercepts and shots at goal in netball, or offensive yards gained in football? Even at an amateur level there is some form of analysis taken. From this analysis, training schedules are changed to improve tackling or ball handling skills, positioning and timing of court defensive lines and game plans around offensive plays are altered.
Would it be reasonable to expect that as a business owner or manager that you would want to know what areas you need to work on to help improve the performance of your business?
Aside from actual against budget and actual against last year, as a business owner or manager do you know:
- If the cash conversion cycle of your business has improved or declined over the last few years, and why it has improved or declined?
- How many days on average it takes your stock to turn over and how this compares to previous years and your industry peers?
- If the margins of your business are above or below industry norms?
The above are basic examples of analysis that can be gleaned from your financial statements. The point to be made from this is that if you do not know the answers to questions such as these, then this is a sure sign that as a business owner or manager you are preoccupied working ‘in the business’ instead of ‘on the business’, which inevitably means (luck aside) your business is on a yearly pathway to mediocrity.
So how do you implement financial statement analysis to help you add value to your business?
Avoid Analysis Paralysis
Keep it simple, there is no need to analyse everything on an individual basis and there is no need to overly complicate the analysis. On the P&L side, monitor key inputs (costs) to outputs (revenue) drivers of your business. Note the operative word ‘key’. Apply the 80/20 rule in selecting which costs have the most impact and individually monitor these line items and group the rest. As the saying goes “cash is king” so if you are not monitoring your cash conversion cycle you have straightaway missed a significant opportunity to improve the underlying performance of your business.
Death by Spreadsheet
Most software packages now have the capability to provide some form of selected analysis of the financial information contained within the financial statements. Despite this, it is still not uncommon to find many operators using spreadsheets as a tool to perform this analysis. If so, aim to ensure that the data is at least exported directly from your financial system and adopt best practices around your spreadsheet models.
Timeliness
Improve the timeliness of your management reports; there is more to be gained by being proactive earlier, than waiting until six months after the fact.
Utilise non financial performance measures
Do not wait on your accountant to tell you how your business is performing. Utilise non–financial performance measures to tell you how your business is performing on a daily or weekly basis. For example, your call conversion rate for your sales team for the week, your daily reject rate via your quality control team.
Use External Benchmarking
Nationally, PwC subscribes to the Waikato University benchmarking survey. There are also other national and global benchmarking providers whom can provide industry sector information. Through benchmarking, you can identify your business strengths as well as uncover gaps. When benchmarking your business, understand that the results are indicative only and should never be used in isolation.
Understand what your Ratios Mean
There are a raft of ratios that can be utilised to assist business owners and managers to monitor the performance of their business. We have successfully utilised ratio analysis for a number of businesses, however you should be mindful of not utilising financial analysis in isolation. For example, analysis of revenue by km’s travelled for a transport company does not mean that the transport company is maximising its performance. A particular fleet may have excellent results based on preferred contract rates, but that does not mean that the fleet is fully utilised. A complimentary ratio would be utilisation ratios, such as cubic metres utilised to available capacity for any particular month.
Tony Pattison
Director, Private Client Services.
