What if I told you that you dropped half the money in your wallet onto the sidewalk? Would you walk away from it? Most people would answer with a resounding “no!” You’re probably thinking, “Who would leave their hard-earned money laying around like that?” You would be surprised at how many businesses are leaving their hard-earned money laying on the metaphorical table. While these businesses are great at providing a good or a service, and have tremendously talented operations teams, they often struggle to maximize profitability. The bad news is that one size doesn’t fit all. While the illness is the same, the issue of unrealized profitability has a myriad of symptoms. The good news, however, is that with sound financial analysis such as horizontal, vertical, and variance analyses, identification and tracking of key performance indicators, benchmarking against industry standards, and a clear road map, businesses can ensure they are translating the maximum number of sales dollars into profit.
Financial analysis is the cornerstone of good decision making in business. Imagine this scenario: You run a business that produces widgets. You have an amazing team with great industry knowledge when it comes to production and you’re able to hit annual sales of $5 million. However, as you navigate to the bottom of your income statement, you notice you only have $250,000 left in net income. The truly realized profit is often even lower. Once you take out corporate taxes and principal payments on your debt (if you have any), you don’t have all that much left. The 5% net margin your income statement shows you could be the industry standard. Or you could have dropped some of your money onto the sidewalk. Perhaps your sales process is great, but you are spending way too much on labor or raw materials. Maybe your operations team needs to investigate usage and come up with ways to reduce labor and raw material usage. You could also have a strong gross margin, indicating that the issue doesn’t lie in your cost of goods, but further down your income statement in your expenses. Are you spending too much on insurance or other expenses? Implementing accurate financial analysis techniques such as variance and horizontal analyses, would allow you to easily identify where the issue lies, and respond to these issues in real time, rather than react to them once the damage is done.
The best way to ensure that your business is not losing profitability is to ensure accurate and regular financial analysis, effective internal controls, and a solid corporate strategy. At the end of the day, a business making $1Million in revenue and $100,000 in net profit (10%), is performing better than a business making $5Million in revenue, with only $200,000 in net profit (4%).
If you feel you can relate to the above-mentioned scenarios, Salim Consulting would be honored to offer you a free demo of our services and illustrate the value of financial analysis by showing you tangible results. This way, you can decide if there is value in a partnership with us, without having to put forward any money unless you believe in the benefits of our work.
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