Analyse Your Business in 3-D

Before you decide to apply a strategy to improve your cash flow you must first find the root cause of your cash flow problems. Relying solely on the traditional financial statements to analyse your cash flow is not enough. You need to take into account all aspects in your business. This requires analysing your business in 3-D.

 

The First Dimension: Financial Statements

Traditional financial statements provide a one dimensional view of your business. The financial statements provide a snapshot of your business financial performance at a specific point in time. This snapshot is provides no depth to your analysis. The financial statements are an important part of your analysis but they don’t provide a complete analysis. Your business is not one dimensional and should not be measured that way.

 

The Second Dimension: Beyond the Financial Statements

By using different tools to analyse cash flow, you will get a clearer picture to how your business is performing. These tools provide greater detail about your business then the financial statements. Here are a few examples of tools that you can use:

Observation and common sense –

Most importantly take time to observe what is happening in your business. You know what is best for your business. However it is easy to get consumed with the everyday stuff! Take time to observe the different processes in your business with no agenda or preconceived ideas.Regular monitoring of reports and performance measures –

Select a few reports that are important in your business and monitor regularly. These will vary from business to business, e.g. aged receivables reports, sales reports by customer or product and conversions per phone call.Ratio Analysis

– using financial ratio analysis to determine if any trends are emerging.Profit to Cash Report

– tracks the flow of cash in your business. The Profit to Cash report simply shows the actual cash that the business has received less the cash that was spent during the year.

Benchmarking

comparing your business to the industry standards. 

The Third Dimension: The External Factors

Small businesses can sometimes overlook the third dimension when analysing their business. The third dimension contains the external factors. The external factors are those that occur outside of your business and its control, e.g. economic influences such as the change in interest rates. While you may not be able to control external factors you can prepare for them and reduce the risk and impact of them on your business. One of the best sources of information about the external factors that affect your business are industry reports.

Industry reports

may be purchased from industry research companies though the cost of these reports can be prohibitive for a small business. However, spending a little time on google can uncover enough industry information to analyse your industry and business. Generally start by googling the industry name with the words ‘industry report’. In Australia you may be able to obtain at small charge an industry report from the business development department of your State government. I have been able to obtain free reports sometimes by visiting the office.

Where do you start?

Always start with your financial statements i.e. the profit & loss and balance sheet. These will highlight any obvious starting points in your analysis. The next step is a cash flow statement. This is a financial statement that shows the money coming in and going out of your business for the year. I prefer to use the Profit to Cash Report.

The Profit to Cash Report is a variation of the cash flow statement that is presented in an easy to understand format. This makes it easier for you to see not only the areas that need improvement but also the areas that are having the largest impact on your business.

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