We
are all hustling to close our financial statements for last year.
Hopefully
by now, most small and medium sized business owners have their internal year-end
financials in hand (or half year if you are a June 30 year-end). If you don't have yours completed, get them done as soon as possible.
January
is a great time to look at your numbers.
First,
ensure all month-end procedures are complete and all balance sheet and income
statement accounts are completely reconciled.
Solid closing procedures ensure timely and accurate month-end
numbers. If this is an issue for your
company, definitely make this an improvement goal for this year. A quick, accurate close is essential to run
your company effectively. It’s
impossible to make smart decisions without accurate numbers.
Spend
time now reviewing the income statement and the balance sheet.
Monthly
most business owners compare actual month-to-date and year-to-date results to budget
and to prior year.
At
year end, it is a great time to look at other key statistics as well.
For most businesses, I
like to look at:
- Number of invoices for the year.
- Average invoice amount – calculated: revenue ÷ number of invoices.
- Number of customers that bought from you last year.
- Average revenue per customer – calculated: revenue ÷ number of customers.
- Transactions per customer – calculated: revenue ÷ number of customer ÷ average revenue per customer.
·
Once
you have these actual numbers, drop them into a spreadsheet as follows:
Basic
Business Model
|
Actual per Year
|
Next Year Plan
|
Leads
|
7,500
|
|
Conversion
Rate
|
80%
|
|
Customers
|
5,550
|
6,000
|
Transactions
per year
|
2.00
|
3.00
|
Average
revenue per invoice
|
$ 474.00
|
$ 525.00
|
Revenue
|
5,261,400
|
9,450,000
|
Margin
|
34.0%
|
35.0%
|
Gross
Profit
|
$ 1,788,876
|
$ 3,307,500
|
SG&A
|
$ 1,431,101
|
$ 1,431,101
|
Net
income
|
$ 357,775
|
$ 1,876,399
|
Note
that small improvements in number of leads, conversion rate, number of transactions
per customer, and average transaction value have a huge increase in
profitability.
Also,
look at sales and gross margin by business segment and by customer. Several techniques can be used to including summarizing
customer data in a matrix as follows.
Work
to move customers from the LV/LM quadrant.
Also,
business owners need to review their balance sheet. Many small and medium sized business owners skip
or skim over the balance sheet. Remember,
the balance sheet is a snapshot in time of what your company owns and
owes.
Important
items on the balance sheet include leverage ratios, accounts receivable
turnover, inventory turnover, and accounts payable payment days. All are straight forward calculations.
Note
the power of cash flow with the follow example:
If
you are a $20mm business with $2.2mm in accounts receivable, a 5-day improvement
in receivable turnover means a $274,000 incremental increase in cash flow.
Several
strategies can be employed to improve turnover statistics.
This
is also great time to take another look at your upcoming year’s strategic plan
and operating forecasts. Consider using
some of these techniques to set monthly targets and goals.
If you need any help looking at your numbers,
let me know - I love helping business owners improve their businesses.
As
always – Think Profit!
/jon
