Use Financial Statements to Drive Your SME’s Growth
Posted by Michelle Cowley-Cunningham on 12th November 2019
SMEs often lack specialist finance advisers to help them turn raw finance data into business insight. They often rely on their intuition to see the bigger picture, and hope to get the detail right. Professional advice is always worth seeking; if it will help you build strategy from complex financial information, but there’s plenty you can do by yourself too, if you know what to home in on…
1. Understand Financial Statements
We all rely on an accountant to organise our financial reports and provide summaries, but it’s up to ourselves to make the business-clever decisions based on this information. Whether it’s income statements, balance sheets or statements of cash flow, a solid understanding of each will help you to garner insights and compete more effectively in your chosen market place.
Your Income Statement, that is your P&L, will calculate your company earnings from multiple viewpoints by reporting net earnings and operations efficiency before the impact of taxes and financing. Once you see clearly where your money has been spent and find unexpected price increases, you could for example negotiate better trade terms from vendors or suppliers.
2. Crunch Cash Flow
Statements of Cash Flows report on the flow of cash into and out of your business. The statement of cash flows is only concerned with the overall amount of money coming in (inflow), compared to the amount of money going out (outflow). Cash inflows include sales, loans, and accounts receivable collections; while cash outflows include equipment costs, inventory, and expenses paid.
The statement of cash flows will demonstrate your SME’s cash variation. In other words, what caused the balance in your bank account to increase or decrease. Understanding exactly where your cash flow pain and pressure points are, will help you to make important money-saving decisions. Can you afford a loan to expand, apply for capital to support stock for projected sales when busy, spread your purchase orders more evenly, or even plan them for special offer seasons? Having the answer to any of these questions will improve your business operations and ultimately add to your bottom-line.
3. Forecast Sales
Business growth requires more than money. Setting up a process of continuous innovation is vital to your SME’s growth in the long term. As a business owner, financial data is critical to your success, but only if you know how to interpret the meaning behind the numbers correctly. You may be relying on an accountant to organise your financial reports and provide summaries, but it’s up to you to make the all important decisions based on the information they’ve collated.
Consider making a Sales Forecast. It can be laid out in a spreadsheet as a projection of your sales for the next three to five years. Using different sections for each sale type and a separate column for every month for the first year, and monthly or quarterly columns for the next three to five years, you can map your projected sales. By providing separate blocks for pricing, unit sales, calculated sales, unit costs and unit costs of sales, you will be more able to see your gross margin and plan your cash flow or time to expand more precisely.
4. Balance the Numbers
By comparing your income statements from different accounting periods, you can monitor whether your SME has been more or less profitable over time. Plotting trend timelines for your spending and production processes, will help you uncover where to target your business strategy for growth. Taken together with your Balance Sheet, showing your overall financial health including your liabilities, equity and ultimately your assets, you will be able to determine your spending power or capital procurement capabilities to make the changes you need.
5. Fund Growth
Ultimately, your financial statements can really tell you how successful your business can be. For most small and medium-sized enterprises, your financial data and management information will tell you what’s happened in the business to date, but as you can now see great value also lies in what the numbers suggest might happen in the future. Planning for that future by having the capital in place to take advantage of opportunities as they arise, will be critical to the continued growth and ultimate success of your SME.