Key Trends to Look for When Assessing Financials

Written by Carol Coughlin. Posted in Financial Strategy

When businesses try to figure out why they are in trouble, looking at columns of numbers or endless pages financial statements to find the problem can seem like searching for a needle in a haystack. What they need is a magnet. When assessing financials, there are several “magnets” that help us pull out the information we need to determine the financial foundation of a company – and to get it back on track for sustainability and growth.

Are Your Numbers Telling You the Truth?

When BottomLine does an assessment we take an all-encompassing look at the business: how do you make money? What lines of business do you have? What is the profitability by product lines? What are your internal accounting and finance teams up to? How are they adding value? What documents and information do they give to management – and what does management do with it?

And you thought your neighbors were nosy. We look at all of this because we want to make sure that the information we have from your company is reliable. Say a client puts down a $100,000 deposit on a six-month project, and you book it as income for this month.

That’s one of the magnets we were talking about. It tells us that we cannot trust your information, that your P&L is wrong. That deposit covers six months of work – your labor and associated costs are going to be distributed over that period. Recording it as this month’s income is inaccurate, and it can set you up for an upside down cash situation. How you record your major categories of expense and income can tell us a lot about your financial wellbeing.

Trending Now: Liquidity

Next, we analyze three years’ worth of your company’s financials to look for overall trends and patterns, and compare this  information to others in your company’s industry. How much cash do you have? What are your current assets? Liabilities? What is the return on equity? Return on assets? How is sales growth compared to peers? How fast do you get paid for your services and pay your vendors?  Are your receivables up to snuff with industry or getting older over a period of time?

Maybe you’re not supposed to show favoritism for your metrics, but days in accounts receivable is terrific. Say a law firm, which is labor-intensive, doesn’t send out its billing for 60 days. Their cash situation is going to be significantly impacted: they’re going to have to pay all of their attorneys and staff, but they’re not collecting cash for two months out.

Are the days in AR are getting older over the three year period? And how does it compare to the industry? That’s going to tell us if a big account is aging, if it’s taking longer to get bills out the door, or if collections are too slow. This is a great lever to pull because you have a lot of control over when bills go out and how you collect. We can often generate more cash (and quickly) within your operation by having more efficient processes for these activities.

So How’s Your Gross Profit Margin?

Looking at your gross profit margin over three years can help us find the big sharp needle waiting to jam itself into the foot of your business. For example, if your GPM was 50 percent in 2011, then 45 in 2012, then 40 in 2013, we know there’s a problem and we need to zero in on it. Comparing this to the industry is essential as well. Is everyone seeing a decline – or is it just you! In any case, we can uncover this information and use it to formulate an action plan.

Looking at trends like this, at high-level indicators, is an effective way to figure out what’s going on in your company. When we compare this information to past years and to your industry, we can target specific areas that need attention. 

What’s Next?

Hope you like us, because we’re sticking around a while longer. The deliverable on this assessment process is actionable recommendations, customized for your business. We develop a work plan to help improve profitability, improve cash flow, increase financial staff skill, or address your other needs. This plan says: here’s where you are, here’s where you want to be – and here’s how you can get there.

Then we roll up our sleeves and get to work. We’re not going to tell you what to do and then say, “Good luck!” Instead, we’ll be there on the ground with you, working to help you reach your goals and build a more profitable, sustainable company.

A financial assessment is designed to find the needles in the haystack of your business. But it’s only part of the process. Next is figuring out what to do with this information and formulating a plan to get you where you want to be – together. 

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Carol Coughlin

Carol Coughlin founded BottomLine Growth Strategies, Inc., in 2006 as a way for small and medium-sized businesses to access the same high-level financial and operational expertise that gives large companies a distinct advantage. Using her own extensive corporate experience and willingness to sit in the hot seat as a catalyst, Carol helps BottomLine Growth clients climb to the summit of their success.
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