If you have a trusted financial controller or advisor that looks out for some of these, that may be just fine, as long as the daily decisions that you make take these indicators into account - which means your trusted advisor must keep you informed. Here are some of the more financial questions.
Please note that the answers are not provided because none of these questions are "one answer fits all".
- How Much Profit Do You Really Make On Each Of Your 10 Largest Customers?
Why? Because the profit you make on those big customers primarily determines the profitability of your business. Consider how often they buy, how large their orders, and how well they pay. Those are the obvious things. But now consider also the special price concessions you might give them in appreciation for their business. Do you extend special services to them in delivery, warranty support, or other customer service? Do you extend payment terms?
Each of these extras cost your organisation time and money - both real costs of servicing that account. This is not to say you shouldn’t do it, but know how profitable that account is in order to make the best decision for your organisation. The largest customer isn’t always your most profitable. Are you giving those concessions because you’re building a relationship that will pay off "later"?
- How Much Does Each Product You Sell Really Cost You?
If you lose money on every product you sell, it’s really hard to make it up on volume. It is amazing how many companies figure their all-important Gross Profit on a product by deducting from the selling price only the direct costs of manufacture or purchase.
Unfortunately, this is rarely the true cost of a product you sell. Consider the costs to receive, package, warehouse, and deliver the product. How about servicing the warranty on its performance? The development cost if it’s your proprietary product?
And then there’s the overhead cost of running your plant or warehouse - costs related to having the facility ready and manned for your operations, from the lights and workers compensation to the stock pickers’ wages to the cleaning service and the maintenance contracts on your equipment. If one of your products requires a disproportionate amount of overhead costs, an average overhead calculation for your organisation as a whole will never give you the right answer. Your most popular item could be a loss leader without you even knowing it.
- How Quickly Does Your Inventory Turn Over, During A Year?
Funny things happen to inventory that doesn’t move out of your warehouse pretty quickly. It disappears. Or it breaks. Or it becomes old, obsolete, or generally unusable. Or it just gets misplaced or lost, to be found soon after you’ve bought more. Or the market price comes down and you have to mark it down to sell it. All of these results take money out of your pocket without giving you any benefit in return.
The first step in preventing all these things from hitting your bottom line is to know how quickly your inventory turns over and to note any changes in that rate. This is the first step in preventing inventory losses, followed closely by refining the overall turnover rate of a product - specific turnover rate, at least for high cost items. Be careful because expensive items that don’t move may be hidden by fast moving commodity items that have much lower margins.
- How Quickly Do Your Receivables Get Collected?
This sounds like a no-brainer but collections can get out of hand without realizing it because you’re busy selling more and "managing the growth".
Always have this information close at hand.
- When Will Your Cash Reach Its Highest and Lowest Point During the Year?
How much cash will that be, roughly? Everyone seems to agree they’d like to know those answers, in order to plan for short-term borrowing needs, or to explore investment opportunities in advance. Yet few small business people believe they can get the answer in any way that’s reasonably reliable or cost-effective.
Many business owners track cash flow by following net income and the bank balance, neither of which is going to be very useful in predicting future cash needs for most businesses. Capital asset purchases, growth in inventory, receivables and payables, debt servicing and expanding capacity - all can have a profound influence on future cash balances, and all are reasonably predictable with a little work.