Cash flow can never be ignored. Even cash-rich businesses should keep an eye on this and understand how they will fund operations going forward.
Cutting costs is one way to access more cash but there are often opportunities in ‘Aged Accounts Receivables’. Poor collections processes prevent access to cash that has already been earned.
A reality of business is paying taxes. Understanding your obligations (and how you’ll meet them) and the impact on your cash flow can reduce the burden of worrying about tax. Of course, this leads to a discussion on a tax mitigation strategy.
Compliance with Contracts
Financial statements present one aspect of the business but they don’t necessarily capture ALL consequences of business decisions. Example: The financial statements reveal that rental costs are way too high and are negatively impacting the business. A purely ‘financial’ decision would be to cancel those rental contracts… but that may not make sense where cancellation terms impose penalties on your business. Consider ALL the implications of business decisions.
Human Resource Concerns
Businesses are made up of people. A business may have the best products in a great market with limited competition… but if the people are not productive or cannot collaborate, the value will not be created. The Financial Statements can give clues on general staffing concerns, employee turnover, retention, recruitment and/or training costs, litigation, etc.
Are the current compensation structures working? Are the incentive plans actually incentivising employees to be more productive or remain with the business? Financial Statements provide guidance on this.
Every business will – at some stage – go through a ‘succession event’, that is, a change of (complete or partial) ownership. It may feel like a long way off but many leaders ignore this until they can’t properly control the process and they don’t get the best outcomes for the business or the owners. Financial Statements provide one data point as to the value of a business and this may warrant discussion from time to time.
It is impractical to try and discuss all of these issues at every finance review. Much more sensible is to consider the highly strategic, long-term discussions on an annual or semi-annual basis. The more frequent reviews should look at tactical questions and ensure you are on track to achieve the strategic goals. A business in distress will need to be hypersensitive to their predicament which requires a flexible approach with quick action. Like all business meetings, a financial review should generate “WHAT, WHO, WHENS” – a list of actions to be taken to improve the business.
Again, each business is different so you should implement the Best Practices that make sense to you. And please get in touch to improve your understanding of your Financial Statements and enable the best possible decision-making for your business!