Keep a close eye on financial performance

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Bikky Khosla | 18 Sep, 2012
What do you do to keep track of the financial performance of your business - this may seem like a puzzling question to many small business owners. Whoa! Do we really need to do that? Most of the small business owners will tell you that their smaller size doesn't need this. Lack of time and limited resources are cited by them as other prime reasons. There are so many things to look after, so many things to spend on, leaving not much time and money for doing "something extra".

This is a wrong approach. Whatever the size of a business, I think a firm should follow a formal accounting system, not merely for the purpose of producing financial statements which need to be submitted while applying for bank loans, but also to manage finances properly and monitor business performance efficiently. Secondly, every small business should implement some financial performance indicators and spend a few minutes every month to track what is happening in their business. Let's see why.

The results of your operating decisions appear in your firm's financial statements, and they can help you answer key and crucial questions like whether you will be able to pay off debt in time, how much debt your firm is using, are you getting a good rate of return on your assets, and so on. To get answers to these questions and understand the financial effects - positive or negative - you must have the basic idea about some key financial ratios like current ratio, debt ratio, inventory turnover ratio, etc.

Since the traditional financial reports are published quarterly, half-yearly or annually, I also recommend every small firm to regularly monitor some key performance indicators (KPIs) useful to financial management. Measures like Debtor Days (accounts receivables / sales x 365) that tells how quickly cash is being collected from debtors, Liquidity Ratio (cash and equivalent / current liability) that measures ability to turn short-term assets into cash to cover debts, Inventory Days (inventories / purchases x 365) that tells how many days the goods you purchase stay in your warehouse, etc. can let you know a lot about how you are doing financially.

For small firms, it is easy to ignore financial evaluation, unlike sales and operation, but by doing that they usually invite nothing but trouble. On the face of it, your finances may seem in order, but underneath the surface there may be something that needs your urgent attention. A performance evaluation mechanism in place will ring the alarm bell for your small business before a problem turns violent.