Today’s Manufacturing Question Answered – August 30, 2024
By Garry Hojan
Our Solution
A: Let’s take an analogy of business health being like physical health. If people are the muscles, then money (finance) is the lifeblood. 82% of the time, businesses die due to a lack of money, and understanding it is crucial.
Revenue, and in particular profit, gives the organization what it needs to strengthen its muscles (made up of teams, owners, community, the world-at-large), which, when understood and managed correctly, can result in abundance.
This allows your organization to become a winning team of professional athletes competing in the game of life and business.
A friend and mentor said, “Know thy status.”
The place I start when assisting a client with growth is to ask for the last three years of Profit & Loss (P&L) statements, a standard financial report, and benchmark it against industry averages. I also review the balance sheet, income, and cash flow statements.
If you don’t know how to decipher these reports, take the time to learn. Yes, it’s that important.
If you have an accountant, I suggest speaking with them first. They can review the different reports with you and tell you what they mean.
Be aware that more and more accountants are moving away from advising and instead only doing tax preparation.
Next, educate yourself by reading. The first book is “Finance for Non-Financial Managers” by Gene Siciliano. Another good resource is, “McGraw-Hill 36-Hour Course: Finance for Non-Financial Managers.” Both are available on Amazon for less than $27.
These suggestions are likely your shortest route to understanding financials. Google and YouTube can also be your friends.
P&Ls are great tools for showing what has happened financially in your business (trailing indicator). I like to check them monthly and more deeply quarterly and also do a “Year in Review,” looking for trends and anomalies and diving deeper where needed.
For growth keep an eye on gross profit margin, which is gross profit/revenue.
For business health there are additional things to monitor like current ratio: current assets/current liabilities (to gauge liquidity) and quick ratio: current assets – inventory/current liabilities (a more stringent liquidity measure).
Any bookkeeping software should have P&L reports, if yours doesn’t or if you don’t have bookkeeping software you can set up a simple spreadsheet. If you need a template, email me and I’ll send you one.
The first step is to know your status, and your financial history. The next step is measuring and knowing where you’re going financially (aside from accounts receivables A/R). We’ll address forward-looking indicators in a separate newsletter.
“For the Lord gives wisdom; from his mouth comes knowledge and understanding; he stores up sound wisdom for the upright; he is a shield to those who walk in integrity.” Proverbs 2 6:7