HOW TO MONITOR YOUR BUSINESS AND KEEP IT SAFE: FINANCIAL INFORMATION

Posted by John White

Managing and monitoring a business is always a difficult task, from market influences to staffing issues, keeping one’s business on track to succeed and grow is a true balancing act.

Sometimes, however, despite best efforts, things don’t go to plan and the balance tips towards uncertainty for the business. It is essential therefore for early warning signs to be recognised and acted upon.

Usually business owners, especially those that maintain close links to good quality external advisers, will spot the symptoms themselves and take early corrective action. It only becomes a problem when any issues are not noticed or, even worse, ignored and that symptom turns into a potentially fatal illness for the business.

We will be highlighting the triggers to watch out for in a series of news items to be published over the coming months.

In the latest in the series of ‘ How to monitor your business and keep it safe’ we examine the importance of Financial Information.

The quality of Published Financial Information

The key warning signs here are;

  • The accounts are produced late
  • Obvious efforts have been made to conceal unpalatable results; this will be dealt with under “Manipulation of Accounts” later in the series

 

Signs in the Financial Information

There are many indicators in financial information. On their own, they may be spurious, but when more than one is apparent, look for trends.

Consider this list;

  • High gearing and sensitivity to interest rate rises
  • Audited figures differ markedly from the management accounts or interim figures
  • Budgets/cash flows turn out to have been inaccurate
  • Sharp rise in short term borrowings
  • Borrowing is “hardcore”. Little fluctuation suggests business is undercapitalized or losing money
  • Stocks rise more than sales
  • Stock may be obsolete or overvalued
  • Debtors rise more than sales
  • Credit control problems
  • Product reliability problems
  • Creditors rise more than purchases
  • Overdue payments to suppliers
  • Insolvency
  • Net current ratio looks healthy but hides increase in gross assets and liabilities
  • Possible overtrading
  • Profits increases not backed by sufficient cash generation
  • Overtrading
    • Sales increases not backed by profits increases or sufficient cash generation
    • Lunatic overtrading
    • Inability to repay borrowing as opposed to merely servicing the interest.
  • The key ratios are already in the worst performing quartile compared with other businesses in the same industry market sector
  • The key ratios or performance indicators for that particular business show deterioration from previous periods

The key performance indicators for any particular business rely on the fact that only certain aspects of most companies financial performance varies to any extent in the short term.

With a smaller business it is often possible to monitor it quite effectively by keeping an eye on the one or two aspects of its performance that control its’ chances of making a profit.

For example businesses might be monitored by;

  • Weekly output
  • Order input
  • Lead time from order to dispatch of goods
  • Average time taken to deal with a customer

Even very large organisations can be monitored for performance in this way. Many large companies use the following key ratios:-

Key Ratios;

  1. Profit (Before Tax) : Total Capital Employed
  2. Profit : Sales
  3. Sales : Total Capital Employed
  4. Sales : Fixed assets
  5. Sales : Stocks
  6. Sales per employee : Profit per employee

 

If you have been affected by or wish to discuss any of the issues raised by this article please contact John White on 01914112468 or at john.white@baldwinandco.co.uk

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