In our previous session, we talked about implementing a budget and putting together a strategic plan. From there, it is all about executing that plan and turning your plan and numbers into results.
Turning “What If” into Results
The key to turning “What If” scenarios with your numbers into results is being able to read and understand the financial statements and the story they’re telling you about your business. By understanding the story, we can understand what key activities created the results in the first place, thus empowering us to make positive decisions to improve your financial results—turning “What If” into “What Is”!
To understand the story, we need to understand the three financial statements and the story each tells us about our business. Every financial statement (a.k.a scorecard) has key performance indicators (KPI’s) and numbers that drive the KPI’s. Below you will find a little bit about each scorecard, the story it tells you about your business, and the KPI’s and drivers on each.
Profit and Loss Statement
The profit number is usually the first number people look for. Top-line sales most often come next, each of which is vital KPIs for the business, sales, and profit. The number of transactions or average transaction size drive sales numbers. Material and labor costs as part of the cost of goods sold drive profits up or down. The P&L statement tells you your sales minus expenses, equals profit, or a loss. Once profitable, the business must also convert those profits into cash flow.
Balance Sheet
Many things impact cash outside our Profit and Loss Statement. The Balance Sheet is one of them. For example, if you borrow money from the bank, it is not “Sales,” so when you repay it, you can’t deduct the principal as an expense, thereby reducing cash but not your profit position.
The Balance Sheet also tells us if we owe or own the stuff we have (equipment, buildings, vehicles, etc.). This is important because if the business has a lot of debt, any Cash Flow of the company will need to be used to pay that down, reducing cash.
Cash Flow Statement
Where the Balance Sheet tells us the ending balance of each item, the Cash Flow Statement will tell us how much cash was used or generated from each item during a specific time period. For example, if Inventory started at $10,000, and ended at $20,000, then the Cash Flow Statement would show $10,000 cash was used to purchase Inventory. Understanding this scorecard truly helps us understand the difference between our profit position and cash position, and how we arrived at cash on hand.
The drivers, like receivables and Inventory of ending cash (a KPI) on the Cash Flow Statement, are the Balance Sheet items that generate or use cash. For example, if you can figure how to refinance a loan to lower your payments, or collect your receivables more consistently, or purchase a piece of equipment on better terms than a lease, those numbers can drive cash flow upward.
KPI’s as a Tool to Improve Sales, Profits and Cash Flow
What drives the KPI is what can be managed in the business day-to-day – this is where you have power and control! Managing things such as schedule, pricing, and Inventory day-to-day can drive those results. If cash is low, focusing on things like collecting receivables or monitoring your bills closer are the day-to-day action items that will drive the results you seek.
These are a few of the levers you can use to better influence the business’ financial performance and how to execute a numbers-based strategy in your business successfully. By reading and understanding the story each scorecard is telling you and recognizing the key drivers of the KPI’s, we can understand the steps needed to turn our goals into results.
For more information on understanding how to read and understand your numbers, KPI’s or budgeting, please contact us or call (414) 269-8705.
Recommended EWH University Classes:
Essential: Cash Flow Essentials, Business Essentials, Cash Flow Fundamentals
Mastery: Budgeting, Key Performance Indicators, Mastering Financial Analysis, Financial Analysis -17 Trends
