Thursday 26 August, 2004
Receiving key financial information on a regular basis
allows directors to keep their fingers on the pulse of the business.
Directors and CEOs can be either overloaded with paperwork and reports
or concerned that they are not getting enough information to satisfy
their obligations and perform their duties fully.
There are certain financial reports that are essential if a director is
to understand, monitor and analyse the progress of a business. Directors
should ensure that they receive such reports regularly so that they are
kept fully informed. A report doesn’t have to be extensive – it may be a
one-pager with some pertinent figures. However, when used in
conjunction with other reports, such as those recommended here, it will
contribute to an overview of the performance of the organisation.
Ten essential financial reports
- Gross profit margin
It is important to include comparative figures for the same period in the last two or three years in this report. The gross profit margin should generally be consistent with prior periods unless there has been a significant change in the selling price or cost of purchase or manufacture. Any major deviation should be investigated. Remember, a change from 25% gross profit to a 20% gross profit is a 20% drop, not a 5% drop!
- Cash flow and cash position
Cash flow is the lifeblood of a business. A director should be aware how much cash the company has, where the cash is coming from, and where it is going. The cash flow reporting should show both actual and budgeted cash flows, and explanations for unexpected changes in cash flow.
- Debtors days
A sale becomes less profitable if it takes a considerable amount of time to collect the money. If debtors days are increasing, with debtors are taking longer and longer to pay, it means that the company is effectively financing their business. The cash is better off in the company’s bank account than theirs! Poor debtor collections may indicate other problems.
- Debtors ageing
It is a good idea monitor aged debtors for amounts that are slow to be paid. Debtors days may not necessarily reveal this problem as good paying customers can hide the fact that there are slow payers. Customers that are habitually slow in paying are not only a cost to the company’s business but, if they run into financial difficulty, will also increase its exposure. Unless there is a specific reason for giving extended terms to a particular customer, those with debts long overdue should be closely monitored.
- Inventory turnover
Excess inventory can be costly. There is little point in purchasing or manufacturing large amounts of product if you are unable to sell it. Inventory turnover measurement gives an indication of product lines that are losing popularity, and steps can then be taken either to stop selling that product or to promote it more effectively.
- Creditors turnover
It is a good idea to pay within the terms of trade of a creditor and take advantage of any settlement discounts. Stretching payment beyond these terms can sour an otherwise good relationship. Also, the company’s cash flow may look healthy but, if it is not paying creditors on time, you may be missing some cash flow problems.
- Bank reconciliation
The bank reconciliation is the key to financial reporting. Without a reconciled bank account, you cannot be certain that the other information supplied to you is complete. You should insist on the bank being reconciled on a regular basis, and certainly before you accept any management reporting.
- Sales analysis
Do you know the company’s top twenty customers by revenue? By profitability? Are they still spending as much as they were? What are the highest selling product lines? What are the most profitable product lines? Are these changing? How much discount is being provided? What new customers have been gained? What customers have been lost? The answers to these questions are provided by a sales analysis report and enable decisions to be made about the allocation of resources in both the sales and production areas.
- Capital expenditure
The company has a good gross profit margin, sales are up, debtors are paying well, and the company is paying its creditors prudently, but there is still no cash in the bank. One reason for this is that cash is being spent on capital items. Unless you are anticipating a fair return on the capital expenditure, be wary of overcapitalising the business. A capex report detailing approved budgeted expenditure versus actual is invaluable in ensuring cash is spent where it gets the most benefit.
- Budget vs actual vs forecast profit and loss
The profit and loss budget is critical and needs regular monitoring. Budgets, particularly expenditure, should be set realistically. Actual profit and loss results should be compared against the budget and any major deviations explained. Major assumptions should be detailed at the time of setting the budget, which should then remain in place for the period. The budget should then be compared regularly against actual results and a forecast prepared for revised results, taking into account changes in the underlying assumptions and business conditions. This forecast then becomes the tool for ongoing monitoring of the performance of management.
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