Financial Statements: Providing Useful Information

Reviewing financial information periodically helps assess company performance and identify areas of improvement.  Reviewing historical numbers and results consistently can help decision makers turn things around, remain proactive and identify problems sooner rather than later.  Having good accounting records and being able to access financial statements will help management review key performance indicators and measure the company’s performance with the company’s objectives.

Before any analytics and determining key performance indicators, an organization requires a good accounting system to capture all transactions and events that have been incurred by the company.  Having solid accounting software and staff to ensure that all revenues, expenses, inventory purchases, accruals, etc. have been captured in a timely manner is very important; as they say, garbage in, garbage out.  MP Group has assisted many companies set up their accounting systems and software so that businesses can start capturing financial data efficiently and effectively.  It is important for growing companies to have a good accounting function to ensure that they have a means to assess company performance.

Key Performance Indicators (KPI) helps businesses assess financial health of a business.  KPIs are tools that allow management to assess company performance over their goals and objectives.  Ideally, businesses want to increase the bottom line and maximize shareholders wealth.  KPIs help decision makers identify trends and determine how well the company is meeting the goals and objectives.  Having good financial statements and accounting records help determine the true KPI figures and can help management come up with solutions to problematic areas identified (i.e., why certain costs were so high for the month, why sales dropped for the month, etc.).

Here are some top Key Financial Metrics and KPIs that can be determined from the financial statements:

Gross Profit:  This determines the margins on carrying out the revenue generating activities before operating expenses.  It focuses on production costs that are directly related to generating a dollar of sales.  This is an important metric as it helps assess whether taking on certain projects is worth taking on a go forward basis.  This can be expressed in dollar amounts or as a percentage

Net Income or Profit:  This is the bottom line.  It provides you with the overall profits earned for carrying out the business activities.  This as a percentage of Sales can provide a good sense on what percentage of sales is retained by the company.

Accounts Receivables Turnover:  This KPI helps you determine whether you have a collections problem.  Cash is King for any business.  Therefore, identifying slow paying clients would help you determined whether you have to take additional steps to shorten the time of collecting from your clients.  On an overall level, this will help management assess the company’s cash flow and avoid a cash crunch.

Inventory Turnover:  This KPI helps you determine how quickly the inventory is held before it is sold within the year.  This is information is important because it shows you whether there should be changes in when you purchase inventory and avoid warehousing or shipping costs when possible.  It can also identity problems with slow moving inventory and management can then determine ways to improve.

Working Capital:  This is calculated by reviewing the balance sheet and can be simply calculated by taking total current liabilities subtracting current assets.  This helps assesses the company’s ability to meet short term liabilities.   

Current Ratio:  This is similar to the working capital as its uses the same components from the balance sheet.  It is calculated by taking current assets dividing by current liabilities.  If this ratio is high, it supports that the company can easily cover current liabilities.  It may identify a high cash balance which may be used to reinvest into the business.

There are many other metrics and KPIs that are useful for business owners.  However, good analysis and decision making also stems from good Financial Statements.  MP Group has the experience and knowledge base to help prepare valuable financial statements for your company.  For more information, contact an MP Group professional.

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