Matter & Substance
  September 5, 2016

3 Keys to Strong Business Financials

We work with many successful companies across a wide variety of industries, providing financial leadership and advice. One thing that we do is look at common factors that help companies reach their goals. While every business needs solid internal financial reporting, there are some key points within the company's reporting that show a strongly performing business.

1. Ample Revenue and cash flow

You've no doubt heard it before, but this cliche is true: Cash is king. Without a robust revenue stream coming in, profitability will be precarious. To determine how much revenue your company needs to be profitable, perform a profitability break even analysis. Then review your sales and determine where you can make changes. For example, you may need to invest more in R&D or focus more on prospective customers.

2. Well-managed labor and production costs

 For most companies, labor is their biggest production cost - particularly when benefits and taxes are factored into the equation. Determine whether your labor force increases the value of products or services enough to offset its high cost. If not, consider solutions such as:

  • Providing more training or better incentives
  • Improving production processes, or
  • Investing in more modern facilities

When production overhead costs are too high relative to a product's sales price, take action. You might increase the price of the product, find better production methods, or even discontinue the product.

3. Lean operations

Operating expenses - costs you incur to run your business that aren't directly attributable to production - must be minimized. For example, compensation takes a big bite out of your operations budget, so monitor staffing needs relative to sales and adjust them if necessary. And while you can't eliminate marketing expenditures, you can review your sales levels relative to them and ensure you're getting bang for your buck.
Establish a foundation
If you're trying to build the foundation for a healthy, long-lived business, focus on these three key factors. We have often found that having these three building blocks in a place can lead to even greater opportunities, including product and territorial expansion, acquisitions of competitors, and building a strong and sustainable management team.