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| Beyond Survival - Financials |
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Beyond Survival-Financials #3
Westpac Beyond Survival #3
Business survival in the 21st Century - Seven key areas of failure
by David Dandie - Westpac Bank
Monitoring financials
There are plenty of reasons to own your own business. Its one of the greatest challenges you can face. Your success will make a clear statement about your skills, ingenuity and perseverance. One thing that is for sure is that people don’t go into business to go bust.
Despite their intentions, history shows that three out of five businesses fail within the first three years of set up and of those that survive nine out of ten will disappear within ten years of set up. As a Bank we were interested in why this was the case. Whilst there are thousands of reasons why businesses fail there are really only seven key areas that impact on financial performance. The first of these is to understand and monitor your financial position.
Monitor Financial Position
Are you one of those people who pick up the financial statements, look at the bottom line and then sigh with relief when you see you have made a profit? You probably also quickly file them in the bottom drawer to gather dust with all the others! If this completes your financial analysis for the year then you have just filed away the most important financial tool you can use in your business.
All financial management begins and ends with those statements. Your companies strategic plans and operating decisions ultimately boil down to the bottom line that is measured in dollar and cents. These statements show you how you have performed in the past, what did you do right, what did you do wrong. Once you understand these things you can learn from this information to help project the future of your business.
Why is it that many business owners don’t make decisions based on their financial statements? Often it’s because they don’t know how to interpret them and unlock the key information.
Profit & Loss and the Balance Sheet
The key aspects when looking at your financial statements are that they must be well prepared, accurate, current and in a language that you can understand. Be aware that most financials produced are for tax purposes and not management purposes. Remember that your planning results and the usefulness of this information are only as good as your own record keeping.
A starting point would be to transfer the information from as many sets of your financials into a spreadsheet format. Use at least three years of data and then look closely for any significant trends. After this, ask your accountant, banker, adviser for key ratio’s that you should monitor in your business. A ratio is only where you compare one number against another to tell you a story about your business. Do not be afraid to ask why are these ratio’s important to me? What is it going to tell me about my business? How would I improve this performance if I had to?
Benchmarking
Many of us wish that we could knock on our competitors door and ask what their profit was last year. You want to know if they are in the same boat as you and see how they are really going. Unfortunately not many will divulge this information. The next best thing is to look at the industry average or a benchmarking study which are available from many internet sites.
These studies show how the industry has behaved in the last trading period and helps you identify key ratios relevant to your industry. Comparing key ratios against company trends and industry averages will help identify ticking bombs in your business, hopefully before they explode. Benchmarking studies are also used to show how the top performers have achieved their results. What were their key success factors? What differentiated them from the competition?
Every business operator wants to make prudent and well informed decisions. You can never eliminate intuition or gut decisions but you can back these decisions up with facts by understanding your financial statements, company trends, industry behaviours and performance.
Beyond Survival workshop sponsored by Westpac Bank explains financial statements in a simple and easy manner, addresses key ratios in business and shows how to use these with benchmarking studies to improve your business performance.
Please call 1300-769-441; +61 3 9802-5288; email or fax: +61 3 9803-8296
for finance and leasing assistance.
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