Business value drivers - Nr 2 Financial Performance

Everyone goes into business for a reason. That reason will be different from one person to the next but in the main, I have found that there are three key things that people strive to achieve when starting or running their own business

·????????More time

·????????More money

·????????More freedom

?Over my career (which spans 25+ years working in industry) I have seen businesses come and go, flourish and struggle. Business owners face numerous challenges throughout the life cycle of their business. A lot of these struggles are created by factors outside their control but some are not.

?For me, there are ten key principles that business owners need to keep focused on throughout that life cycle if they are going to achieve the above three goals.

?Last week the article was on the first of these business value drivers being Single Point of Dependency.

?The value driver that we are going to explore in this article is Financial Performance

?Financial Performance

The hard truth is when someone buys your business, they do not consider the hours, the sweat equity, or hard times that you've navigated to get to where you are today. Instead, their focus is all on the future profit that your business is expected to create. Those future profit streams are exactly what they are expecting to buy, not your history. Whether you want to sell soon or if you're looking to capitalise on managing the business for a while, the business’s streams of profits are important.

?To increase or improve financial performance there are five key areas to focus on

?1.???Financial information for the last three years

Having a full set of accounts for three years of trading allows any investor/purchaser or??person interested in acquiring your business to understand the progression of your?business across that period.

2.???Consistent Key Performance Indicators

The good old analogy still stands “you get what you measure”. Having Key Performance ?Indicators in different areas of the business allows you to monitor progress in non-financial terms, gives visibility of areas requiring improvement, and helps with predicting?the future. KPI’s also help to give real meaning to financial data

3.???Business Plan for the next 3 years

Creating and using a 3-year business plan helps the business have a defined plan on how they expect to move forward and achieve goals. However, it only becomes useful when it is translated into accountable actions and commitments that are essentially the stepping stones to achieving the greater strategic direction of the company. True performance measurement is when actuals are compared to this plan and reasons as well as corrective actions are identified to ensure that the business does not deviate from its overall strategic objective

4.???Built by the management team and results shared with everyone

It is extremely important for the success of any business if the plans and actions are?compiled by the management team giving due consideration to everyone’s role and?contribution. The business plan should be distilled down into SMART objectives for each?division, department, and ultimately every employee so that a combined effort is made to????????achieve or deliver the same strategic goals /objectives. Whilst this might seem like a lot of????administration to implement, facilitate and monitor it is vital to its achievement.

5.???Monitor and measure

Performance needs to be reviewed regularly against the plan so that adjustments can be made for controllable and uncontrollable factors that arise. The general rule of thumb for?any progressive organisation wishing to improve results achieve growth and be sustainable ??is to only allow for one adjustment per year that is off-plan. Allowing several adjustments ?will mean that the true essence of the plan risks being lost or changed.

?Effective financial controls are fundamental for financial performance. Financial controls are not only a critical element of business management but also safeguards for a company’s assets. Most importantly, effective financial controls support the claim that the company is consistently profitable.

Once again, put on those buyers’ shoes. You are buying a company that you likely had not heard of three months ago. You face an owner of a business who asserts that the company has been making ￡1 million per year for the past three years and is projected to make at least that much in the future. Your first thought must be “prove it.” If a seller then produces past financial statements that prove incorrect, insupportable, or incomplete, you will be highly skeptical, or, most likely, entirely uninterested in buying. You need to have complete confidence in the past financial activity of that company.

Knowing your business – financially – will provide the roadmap to achieving both short- and long-term goals. Today's cash flows are met, and solid financial acumen positions?tomorrow’s financial performance route to success.

?If you like this article and what to find out more about how Ekstra Accounting Solutions can help, you can get in touch in the following ways

Telephone: 07458 302 512 ?????????????Email: [email protected]

Website: www.ekstraas.co.uk????????

“Accounting with foresight”