When business owners utilize financial data in an efficient way, their companies are able to function and grow exponentially. Small Business Financial Health Analysis from the Bank of Chicago stated that business owners that understand financial data tend to have enterprises with bigger profits and revenues, larger workforce and are generally more successful.
Understanding how to use your financial data is not only beneficial, but also necessary in some cases. Financial metrics can serve you in a variety of ways to guide your business progress and help you know how well your business is doing. From bench-marking and goal-setting in asset management, tax optimization and risk management to financing and other strategic decisions, proper usage of financial data can benefit you and your company. Once you develop a habit of this, you can stay on top of your business financial health and mitigate any future issues.
Directing internal decisions
Financial data enables decision makers inside the company to have the necessary information for making effective choices. Income statements, accurate balance sheet, cash flow reports and profit-and-loss statements provide owners with up-to-date information that enables them to steer the company in the right direction.
For instance, when you are deciding whether to open a new branch, your data on sales growth will provide you with the necessary input about whether the business can expect a growing consumer base that will justify the branch opening.
Financial data here measures how efficiently your company uses its resources. Low operational efficiency results in poorer profits and slower growth. Financial data here consists of accounts receivables turnover, which measures how effective you are with managing customers’ credit, and inventory turnover.
Account receivables turnover equals net credit sales divided by average accounts receivable. A higher number shows that your business is managing credit well, while a lower one warns that you need to improve customer credit collection. When in doubt, use financing fees which are arrangements that give your customers the opportunity to pay their invoices through monthly payments, while you get your credit upfront.
Inventory turnover represents the level of your efficiency with managing inventory, based on sales levels. It equals expenses of goods sold divided by average inventory. A number that is higher states that everything is fine, while a smaller one enumerates that either your products aren’t selling well or you’re producing too much.
Revenues are often a business’s dominant source of money. Their quality, quantity and timing can show a business’s relative level of growth and long-term success, a crucial concern when making strategic decisions. Data here is divided into the following categories.
Revenue growth is calculated by subtracting revenue from the last period from the current revenue, then dividing the outcome by the total of the last period’s revenues. Don’t add one-time revenues, as they distort the analysis and make you overoptimistic.
Revenue per employee equals revenue divided by the average number of employees. With this, you will know your business’s overall productivity level. The higher the number, the smoother everything is.
Revenue concentration is calculated by dividing revenue from a client with total revenue. If any customer exceeds 10 percent of your total revenue, you could face financial issues if that client stops using your services.
Economic added value
Although a bottom-line contributor, economic value is in the core of risk adjustment. With it, you can decide on time whether to let your business grow and increase its economic value. It will also highlight any required corrective course in departments that are losing value.
To calculate it, subtract your company’s cost of operating capital from its net income. Any business goals of adding economic value are utilized for accessing its value contributions and process improvement for resource allocation.
Financial data regarding liquidity
Here, you’re examining financial data regarding your company’s ability to create enough money to pay all of its expenses. Revenue growth and profits, regardless of amounts, will not be able to compensate for insufficient liquidity. Here, we employ the current ratio calculation, where you divide current assets with current liabilities.
This measures the level of your company’s capability to cover short-term obligations with money and any current assets. A number lower that one indicates that an enterprise doesn’t have enough liquid resources to meet its obligations, while a number higher than two shows great level of liquidity. However, an interest coverage value that is lower than one point five may be concerning to your lenders.
Balanced financial data emphasizes a company’s financial performance as a core indicator of its potential for future growth and success. When you understand your company’s financial data, you can link its performance to your strategic goals. Having high-quality information when making any decisions about your business, its growth phase, operational costs and revenue quantity and quality is always a good thing.