Use Financial Monitoring to Get Your Small Business Future-ready

The Covid-19 crisis has plunged business leaders into uncertainty and prompted some companies to radically rethink their business and strategy. Others had to close down or may be facing that fate with company insolvencies set to increase further in 2021.

To deal with the unexpected, executives have had to be nimble and flexible, working quickly to adapt. With unforeseen events on the rise, relying on accurate financial indicators is more important than ever before. Let’s talk about the indicators that will help you – and your small business – to chart a course through the storm. 

It is important to keep in mind that measuring financial performances is a way to steer the company going forwards, and not only to assess performances after the fact. Companies often check their financial indicators too late, whereas by reviewing the numbers regularly, you can make upstream adjustments to cope with unexpected developments, such as an economic crisis.

Besides cyclical developments, unforeseen events may affect the company itself, its sector or market. These should be addressed by reviewing the firm’s strategy and business plan.

Tip: When you created your company, you drew up a business plan. Keep it up-to-date! This plan must contain at least the following elements:

• a projected income statement,
• a provisional balance sheet,
• a monthly cash flow forecast,
• a financing table,
• a table of investments,
• the calculation of the working capital requirement,
• and the calculation of the break-even point.

Several indicators can play a vital role in making sure that your company is in sound financial health. They include a range of accounting metrics that are typically organised as a dashboard.

The dashboard is not just for your accountant. As an executive, you should have daily access to it. The dashboard indicators include the break-even point, the company’s profit margin, cost of goods sold, financial ratios, working capital requirement and cash flow management.

These indicators may be supplemented by cash metrics such as the average times taken to collect payments from customers or make payments to suppliers:

• Days Sales Outstanding (DSO) indicates the average time it takes your company to collect payment between the issuance of an invoice to a customer and its collection. This indicator is useful for calculating your working capital requirement.
• Days Payable Outstanding (DPO) is the average time it takes for you to pay your invoices to suppliers. The lower the number, the shorter it takes you to honour your commitments to your suppliers - which sends them the message you are not facing financial difficulties.

While accounting indicators can be checked weekly, cash indicators should be monitored every day. Whatever the case, setting up a dashboard will allow you to keep daily tabs on all of your key performance indicators.

Tip: Accounting software can be set up to issue warnings if indicators exceed trigger levels. Do not be afraid to set extremely sensitive levels so you are alerted if anything unusual happens.

Setting up a system to monitor key financial indicators has multiple benefits. In addition to enabling you to react swiftly to unexpected events, it will also allow you to project into the future. By keeping a close watch on your financial performance, you gain added visibility.

For example, if you are looking for new financing, it will be easier for you to explain year-on-year earnings fluctuations if you have kept track of accounting developments throughout the year.

Tip: Having a thorough command of financial indicators is the best way to make the right strategic choices. Potential financial partners will appreciate the transparency. Your ability to cope with crises and deal with cyclical risks will be made clearer in their eyes if you can provide a detailed rundown of your financial indicators.