Do You Have the Right Tools in Your Financial Toolbox to Develop Strong Strategies and Reach Your Goals?
February 26, 2021
| BusinessFocus-Business Focus
Happy New Year from all of us at Security Bank! With the new year comes new opportunity for area businesses. Things remain uncertain, but we’ve found that most years the main thing that remains certain is uncertainty itself to some extent. There are in fact some ways to help business owners navigate times of uncertainty whether that uncertainty is positive or negative. This month’s article talks about some small business analysis tools that a couple of our lenders recently came across at a conference that might be helpful.
Do You Have the Right Tools in Your Toolbox to Develop Strong Strategies and Reach Your Goals?
By Lee Potts –VP/Senior Credit Officer
A lot of things affect your business in any given year, whether positive or negative. If you are reading this article, give yourself a pat on the back because you made it through 2020, which as we know was one of the more challenging years we have seen in a while! While challenging, hopefully the year has some things you can look back on and feel good about how things went in your business overall.
Regardless of how things may have turned out, we would further challenge you to determine what impacts the year had on your business by measuring certain aspects. You keep your books, keep track of inventories, pricing margins, and the list goes on. There is a trove of data readily available to start building in ways to put those numbers to work for you in your business. What do I mean by this? It starts with using the data to create financial benchmarks for your business.
There are a series of financial ratios that can be used by small businesses to start this process. To name just a few, I am referring to metrics such as Gross Profit Margin Ratios, Net Profit Margin Ratios, Return on Assets, Inventory Turnover, or ratios analyzing inventory turnover, receivables, and payables. A couple of our loan officers attended a conference in the last year (prior to the pandemic) in which a speaker offered some tools by way of spreadsheets that can be quickly used to arrive at these benchmarks.
Let’s take this a step or two further, though. So using the example ratios mentioned, you find the figures, calculate the ratios and see what yours are. Great. Perfect. Now what? What do these mean? How do they compare to other similar businesses? There is information available that can then be used to compare similar businesses and/or if you as the owner have certain goals in mind, you can begin to develop strategies to accomplish those goals.
For example, let’s say the owner has a usual percent for gross profit in mind that he or she likes to aim for. How do we know if that is enough? There is a way to calculate the amount of target gross profit based on actual sales, and then the difference between actual gross profit and target gross profit can be measured. If that difference is $0, then congratulations, you are hitting your target. If there is a discrepancy, that represents a financial impact to the business—plus or minus. You might find in that case that you should consider adjusting your target gross profit to achieve a better financial impact or reach a target total dollars of financial impact that is suggested when doing this exercise. From there, similar comparisons and metrics can be developed from net profit measures, sales, inventory, receivables, payables, etc. You might find that certain, deliberate adjustments here and there can add up to significant financial impacts during the course of a year. What may seem like small “tweaks” could actually add up to real dollars in a hurry.
The main takeaway this month is that in putting these tools to work in your business based on data you already have, you can begin to take more control of the things you are able to control during any time of uncertainty. You can run “what if” scenarios and visualize the possible outcome in a matter of minutes. The list goes on in terms of the amount of insight there is to be gained. Absent doing these exercises, it is difficult to know for sure how the business may be performing. In these uncertain times, how soon would you want to find out?