2023-24 financial year is nearly 2 months old, so my question to the business world is “what have you done to improve profit margins, customer satisfaction and risk exposure”?
By now, the business will have completed the financial reporting for the past 12 months and you should have started preparing the information for the accountant to complete the Australian Taxation Office Statement. While the business should have commenced the process of doing some financial analysis around mid-May so that end of year adjustment can be accomplished to minimise tax. Some might not have proceeded to the next phase (Business Analysis and Improvement strategies).
The current economic environment and uncertainty should provide the business with incentive to commence a comprehensive analysis, as we are starting to see the ramifications of a slowing economy through slowing sales, reduced productivity and profits being squeezed.
The best place to start is with your financial statements preferably at least 5 years of information. For the analysis to provide the performance intelligence that a business can utilise for future decision-making, converting the data into ratio’s is the best form, as it removes the potential impact of CPI increases or inflationary drivers.
So, what ratio’s should a business look in analysing the business. My suggestion is Keep It Simple (KIS) and use only those that can be used to drive improvement (productivity), and they are:
- Gross Profit Margins
- Net Profit Margins
- Overheads/Sales
- Return on Equity and Total Assets
- The top 4 or 5 expenses relative to sales.
The reason is that these KPI’s tell a story, when showing how these perform against the competition and how they trend over time. For example:
- Gross Profit can indicate things like pricing policies, waste, various inefficiencies in the manufacture or delivery of a product or service
- Net Profit can indicate issues relative to both business productivity (cost of inputs relative to output), of various overhead cost levels that drive profit down
- Overheads/Sales (across each cost category) will indicate where some costs are trending up or down
- Return on Equity and Total Assets show how the money invested in the business is performing
- The top 4 or 5 expenses as a ratio of sales will indicate what costs are important to the business, and where to target a continuous improvement program
Once the operational and performance KPI’s have been assessed, now is the time to look at where performance can be improved. Ideally getting a third party to review current performance, identify where there as business strengths and weaknesses will assist the business move to improved profitability.
We can assist businesses to achieve both, firstly by assisting the business measure and analyse the data, and then assist the business develop a strategy to improve.
Good Luck and happy analysing.
John
