It probably goes without saying: CEOs and business owners are busy. From management meetings to strategy development and everything in-between, if you’re like most top executives, your schedule is stretched to the limit. So just how important is it to page through that monthly financial statement? Very. CEOs are not only the visionaries of their companies, but they also need to have a working understanding of the financial issues facing their organization.
The key to keeping current with your company’s financial position is to know what to look for. In fact, if you commit just a half hour reviewing these top five items each month, you’ll have the information you need to assess the sustainability of your organization.
- Are the internal financial statements prepared timely and are they accurate? The information contained in your financial statements is only useful to management if the financial statements are prepared accurately and distributed timely. If the company’s year-end statements are audited or reviewed by an independent CPA, the volume and magnitude of adjusting journal entries is a good indicator of whether the monthly internal financial statements are reliable. The CEO should be interested in knowing if the operational managers are routinely getting the financial data they need on a timely basis.
- Are we on track to achieving our revenue goals? Reviewing the “top line” of the income statement is an important beginning to evaluating the financial performance of any business. This will give the CEO an immediate impression on whether the current strategy of providing goods or services is effective. Comparing the revenue result to current budget and prior actual year is a good gauge of whether the company is trending positively in revenue growth.
- Are we generating “quality” revenue? This question can be best answered by reviewing the “middle line” of the income statement, commonly referred to as gross profit. Revenue minus the direct cost of goods and services sold (generally material costs, direct labor costs and other manufacturing or service related cost) results in the gross profit margin for the business. Reviewing the gross margin, both in terms of gross profit dollars and gross profit percentage, is a very important indicator of whether the overall revenue streams are producing profitable business results.
- Are we performing at the “bottom line”? The ultimate measurement of financial success is whether the business is producing sufficient profits at the bottom line in the form of net income. This takes into account the expenses incurred in the areas of selling, general and administrative expenses and interest expense. Income taxes would also be included as an expense for businesses operating as c-corporations but not for “pass-through” business entities including s-corporations, LLCs, or partnerships. The ability of the business to generate sufficient net income on a sustainable basis should be of primary concern to the CEO.
- Do we have the financial resources needed to carry out our business plans? A review of the Company’s balance sheet can help assess whether the business has the necessary resources to carry out day to day operations, implement new business strategies, make planned capital expenditures and service its existing debt. A review of the following key balance sheet ratios and relationships can be helpful in addressing this question:
- Current ratio (defined as current assets divided by current liabilities)
- Net working capital (measured as current assets minus current liabilities)
- Debt to equity ratio (defined as total liabilities divided by equity)
These metrics, particularly when comparing the trend over the period of years, will help establish whether the company is generating sufficient cash flow from operations and whether the level of borrowing from external sources is changing. They will also help you evaluate current business strategies, provide a critique of whether the recent financial performance is on target and indicate whether modifications to the current strategy should be considered.
Contributed by John S. Stoner, CPA, CVA, partner and leader of RKL Business Consulting Services Group in the Lancaster office. John provides a wide range of business consulting services, including business valuation, litigation support, merger/acquisition assistance and business succession planning to clients in the healthcare, advertising, manufacturing, service and not-for-profit industries.