8 Simple Tips to Get the Most from your Financial Reporting.

8 Simple Tips to Get the Most from your Financial Reporting.
business-1302849_1280-200x133 8 Simple Tips to Get the Most from your Financial Reporting.

Financial Management for Small business Owners

So you have monthly management reports but now what do you do with them? Do you feel like you are drowning in a sea of figures every time you get your financial reporting?

Many businesses do produce monthly management reports, however their relevancy and fit for purpose is often questionable. I have seen many CEOs and FD’s not able to make use of the figures, simply because the data provided is in too much detail. Where this happens, no insight can be gleaned from the figures. More importantly, not enough focus can be gained from the numbers.Inevitably business performance cannot be improved without insightful data so lets consider how you can make the most of the financial reporting you already have.

Here are some tips for simplifying your financial information and this will enable you to spend less time on deciphering and more time on finding real meaning from your numbers.

1. Use ratios to help you see consistency on the figures.

I often use the following key ratios every month so that you can see the trend of the figures.

 Gross margin /Sales %.

 Overhead/Sales%

 Net profit/Sales%

It is easier to get meaning from your numbers by not focusing on the absolute numbers but looking at the ratios. If your business is subject to fluctuating sales month on month, you would hope to see a fairly constant Gross margin/Sales %.

This is far more insightful!

You can quickly see how this % is trending. Where it is decreasing, this will signal to you that you need to break this figure down further. This further analysis is important so you can understand what in your product mix has caused this downward trend.

2. Round up your figures. Many financial reports show figures to 2 or more decimal places. When I produce reports I also try to create summary reports.These give a quick view of the size of the figures to zero decimal places.

Your first view of the numbers need to allow you to quickly scan the face of the numbers. You want to be able to pick out the anomalies. Dealing with decimal places for me is immaterial at this stage, it can actually be distracting.

Depending on the size of your business, it also may be worth considering having these summary reports produced to the nearest £000’s.

3. Summarise the key headline categories. Listing all categories of Sales and Cost lines can get overwhelming. This is especially where you have a large product line and many costs categories. It is important to think, “what are the significant areas and can these be summarised into key groupings?” I was recently working with a business which sells over 3000 product lines of goods.On reveiw, we were able to categorise these into 4 key product types. Likewise, cost categories need to be grouped more by what is driving these costs. Try to avoid simply listing out all the individual cost types. For example, rather than listing out rent, rates, service charges, etc. can these be summarised into say Building Costs? The detail is available if required. Your need to see the detail should only be in order to disseminate where to focus when you have established;

a) if the trend of these grouped costs are on the up and

b) with no apparent reason why.

4. Create non-financial metrics. Using only the financial figures to help you drive and understand performance,   may not give you the insight you need. Translating your revenue figures to a non-financial target will give more insight. This will enable you to see what are the operational activities that need to happen, in order to deliver the final revenue figure. Your staff, if you have any, will also readily identify and understand the scale of the challenge when it is expressed in this way. I have in the past translated our sales figures from the financial reporting into:

a) Number of batches made

b) Number of orders taken

c) Number of hours booked

d) Number of production hours worked.

You need to find the right operational metric which works specifically for your business.

The metric needs to be worked out before hand, so for example, how many batches equals what value of revenue.

What I often find though, is once you have constructed a metric like this, your operational people will use this avidly for helping them to understand what they are aiming for.

Providing them with these non-financial figures alongside your financial numbers will enable you to see how well these metrics are stacking up and whether they need to be recalculated for changes in the business.

For setting cost targets, it can be hard to work towards a  financial figure. Maybe a targeted headcount figure, hours of production or billable services like warehousing space will help you to see how costs are being contained. This looks more then at the driver of the costs rather than at the individual cost categories themselves.

5. Annualise the figures. Sometimes in looking at the figures month on month it is hard to pick out the areas you need to focus on. This is particularly true for those areas where the costs are non-regular in their nature. This more applies to costs like Marketing, Repairs and Maintenance, Subscriptions, Temporary or Subcontracted Resources etc. By taking a view on the full year cost, this helps you to establish if these are inline and reasonable for the size of your business. Irregular costs can often build up slowly. They may slip under the net until the end of the year when they are fully quantified. Try to get a Latest View, perhaps based on run rate of actual spend. This will enable you to review this cost in a more timely fashion. Any necessary adjustments therefore can be spotted and acted apon quicker.

On a monthly basis then, it is not only important to get the current month view but also the full year forecasted view. What may feel like a significant cost in the month may just be a timing distraction.

6. Convert your figures to % and rank. One of the most powerful expressions of materiality can be best displayed in a pie chart. I especially like to use this for expressing sales figures or even Gross Margin figures. This breaks through, once again, the detail of the figures.  This allows you to visually see the impact that say 20% of your sales customers give 80% of your gross margin. The key is to be able to highlight, who are the 20%.You can then show this on a pie chart to make this even clearer.

% ranking in financial reporting, enables the eye to move quickly down a list.You can scan down to see what  are the focus areas in terms of % size of their impact to the whole pot. It can be easily applied to most pots of costs or revenues. Inevitably, I find that for costs there are normally the top 5 costs which make up 80% of the total pot. So, why waste time analysing and scrutinising them all, when simplifying them down, saves you time and maximises the impact.

7. Compare your figures. In deciding which figures to highlight and summarise, the most effective way to see this, is to compare against some type of benchmark. This will be either in terms of a budget, a rolling average, or last year’s comparison. Comparison against another figure adds depth to the figures and enables you to focus on the key variations. It often stops the thought when reviewing a report of “So what? Should I be worried?”

8. Look at key figures weekly. This will help you with spreading the workload and also reducing uncertainty through the month. You need to get a handle on what metrics correlate to sales. Then, what gross margin % you expect to make from your sales. Finally, looking at the metric like e.g. batches produced or hours billed, on a weekly basis, this will enable you to see very quickly, are you making profits this month?

By distilling your business performance into such a key metric can help you to make your key decisions faster. The simplicity of the metric allows for a quick calculation.

If you have a real understanding of the relationship between this key metric, the sales revenue and the gross margin figure and you fully understand your run rate on overheads, you can have a Net Profit figure calculated, before your bookkeeper has even logged on!

 

Simplification of your figures as a small business owner is the most effective way to push your business forward. Being able to turn accounting data into meaningful information, through financial reporting, will not only help you with gaining the much needed insight you need to grow your business, but it derisks your decision making. Do try some of these methods and see if it doesn’t open up the way for you to grow your business faster and more effectively. If you have any sucess do share them with me. I would love to know if this has been useful in helping you to grow your small business.

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