How Financial Performance Monitoring is evolving.
The world is changing. Business is changing. As businesses have changed, so has the role of the CFO. In today’s business environment, the role of finance has greatly evolved, and it now permeates all areas of business and its influence only appears to be growing.
Today, there are new risks, responsibilities and challenges that finance professionals face. They are responsible for analysing and reporting the past, managing the present and planning for the future. Many are leveraging new technology to help them thrive in this evolved role.
There are a number of ways financial performance of your business can be monitored using available data. Let’s broadly divide them into three parts:
Preparation of monthly financial statements – The basic reports that every company needs to produce are the balance sheet, profit/loss & cash-flow statement. They are not only vital indicators of the performance of the business, but they are also required statutorily albeit at a different reporting frequency. They give an overview of the financial health of the business, and in a nutshell, tell the owners everything that they need to know about how their enterprise is faring. Knowing the financial position becomes even more important as the business grows, especially if your plan is to grow the business substantially. Lack of a precise and timely knowledge of the current financial position can lead to business failure and have other consequences for the directors/owners.
Preparation of budgets: – It is important to prepare monthly P&L and cash flow budgets so that you can assess the impact that these projections have on the future cash flow of the business. Budgets should be compared to actual results and variances acted upon, consistently.
KPI’s and ratios – When you start analysing your financial ratios, you can use them to benchmark your business. This will help you assess productivity by comparing your performance to other businesses in your industry.
Some of the commonly used financial ratios are :
- cash flow and liquidity
- risk and return
- stock turnover and sales
To provide useful meaning, it is essential to compare these ratios with
➤ The trend of your results over the past year
➤ The results by your competitors
➤ Budgeted results
➤ Industry benchmarks or general business standards
➤ The effect of economic conditions.
Given that sales, profit margins and cash flow are the lifeblood of any business, owners should place particular emphasis on receiving regular reports on these areas of the business.
It is essential to monitor a wide range of “performance indicators” in your business, in order to ensure that appropriate and timely decisions and plans can be made. Monitoring figures closely will allow you to maximise efficiency and minimise waste, which will help your business in the long run. Today’s monitoring trend is such that the organisations rely more on technology for timely and quick results. With the right use of technology and the right Key Performance Indicators (KPIs), dynamic business activities can be effectively monitored.