The Best Use of Your Financial Statements – Nipping Problems in the Bud
New businesses are usually fraught with ﬁnancial problems: margins too low, debt too high, not enough cash, not enough proﬁts. That’s normal and to be expected. How you deal with these initial setbacks, though, can mean the difference between success and failure for your business.
Even seemingly unrelated ﬁnancial problems go together. A lack of sufﬁcient cash can cause lower proﬁts, for example, and too much debt can lead to too little cash. As you analyze your ﬁnancial statements, look at the big picture instead of focusing on just one area. New business and small- business owners often focus only on boosting net proﬁts rather than the overall ﬁnancial health of their companies. Proﬁtability is very important— without it your company can’t stay aﬂoat—but it’s not the only puzzle piece that matters.
Look into using your assets more efﬁciently, to get as much as possible out of them. Every asset on your books, from your desk to your inventory to your equipment, plays a part in your company’s proﬁt potential. Using the same old assets in different ways can spark productivity and proﬁtability. Find ways to pump up your cash inﬂow at the same time that you decrease the outﬂow; this will help you pay down debt sooner and avoid the need to take on more debt before you really want to. By combining your ratio, vertical, and horizontal analyses, you can spot trends in the making and possible trouble spots, and take corrective action before it’s too late.
You can increase your proﬁtability with either a top-down or bottom- up approach. A top-down approach focuses on increasing sales and gross proﬁts, while a bottom-up approach directs attention to trimming expenses. The quick way to increase sales and the gross proﬁt margin is to increase your markup (a.k.a. raise prices). Use this method with caution, though, as you don’t want to raise prices so high that customers stop buying from you. You can also try to increase your gross margin by paying less for inventory purchases; look into new suppliers, or try renegotiating with your existing vendors to keep your product costs as low as possible.
You can give your bottom line a double boost by both increasing your gross margin and cutting back on expenses. If you find a way to lower product costs, don’t stop there. Try to minimize some of your operating expenses as well.
On the bottom-up front, take a good look at your interest and operating expenses, and cut back anywhere you can. There will be some expenses your company is stuck with, at least for now, such as rent and loan interest. Others, though, can be tweaked; for example, you can cut back on your advertising spending and look for ways to get free publicity, or shop around for a less expensive insurance policy.
Manage Your Company’s Debt
Having liabilities isn’t good or bad; it’s just a normal business practice. Be careful to not let debt spiral out of control, though. As soon as you notice that your company is starting to owe more than it can pay, you need to take steps to bring your liabilities back into the reasonable range. To do this, try to make sure that your current liabilities aren’t greater than your current assets. When that balance shifts toward the negative, it means you don’t have enough current assets to meet your immediate obligations, a sign of coming money troubles.
One good ﬁrst step: stop using credit cards to pay for business expenses. Credit card interest is among the highest you’ll pay, eating up a disproportionate share of proﬁts and giving very little in return. If your company needs to borrow money (and using credit cards counts as borrowing) just to pay the monthly bills, sit down with your accountant and take a good look at your budget. Until your debt is back under control, slash any absolutely unnecessary expenses and take positive steps to boost your cash ﬂow.