Profit Management
In the current economy, annual financial forecasts and waiting for quarterly or monthly financial statements to check profitability may not be good enough. For minority owned businesses profitability is a key to attracting everything from investment opportunities to financing. Savvy minority business owners use timely data from their accounting systems and other sources to improve their company's financial health. How? They track revenues and adjust inventory, labor, and other costs to match current market conditions.
Track and Forecast Revenue
Revenue is what drives most businesses, and minority owned businesses are no exception. But monthly sales reports only cover past history. You want to track revenue daily to get a pulse on what's going on. In some sales-oriented environments, for example retail outlets, post figures even more frequently. Analyzing timely data can help you take appropriate and immediate measures when sales go off course. Keeping a close watch on your data can also help you identify what is working in your marketing mix and what is not.
Revenue forecasting is also a useful tool. Your sales manager, or you, should be forecasting frequently so that you can adjust operations to expected business levels. You can also track revenue through your accounts receivable (A/R). Not only are days outstanding receivables a good measure, but it's important to watch the percentage of A/R that falls into different aging categories. Good customers who do not pay timely may not be all that good for your business. Increases in severely past due A/R can be early warning sign off bigger troubles ahead. The sooner you identify this, the faster you can intervene and take action.
Watch Expenses
Most expenses are difficult to track any more often than monthly. Fortunately labor, the largest expense of many companies, is an exception. Detailed labor statistics such as hours worked, overtime, and labor expense by department should be available with every payroll run. Even though it's hard to get more frequent data in other cost categories because invoices are only received monthly, you can often use proxies to get the information you need. For instance, while up-to-date information may not be available on raw materials expenses, it should be possible to monitor the quantities being consumed as often as needed.
Activity based costing (we will have a guest columnist cover this topic in more detail in a future issue) can be a particularly useful tool to manage costs since it does a better job of allocating indirect costs to individual jobs and product lines that do traditional cost accounting methodologies.
Striking Balance
Ratio analysis is another powerful instrument to help you monitor your company's health. Using ratios can help you quickly identify positive and negative trends in the relationship between revenue and expenses.
In many businesses, knowing the ratio of revenue to labor or material expense can be a strong predictor of net profit margin. Many ratios -- such as labor hours per unit of production or patients seen per hour -- paint a good picture of productivity. Ratios can also be used for benchmarking. As we have written before in this column, you should know as much as possible about how your business measures up to similar businesses and competitors.
The message is - it is important to know the revenue flow, expenses and meaningful ratios for your business. During volatile economic periods, such as now, it is critical.