Every business has what I call financial drivers – if you don’t know yours, you may as well be driving a car without an instrument panel on your dashboard, and you’ll be trying to steer a struggling business.
Last week, we looked at the importance of identifying if you have a struggling business while it can still be saved, as opposed – as so all too often happens – to picking over the bones when it’s too late to find out what went wrong. I outlined the first two of my top four strategies for staying afloat, establishing your breakeven point and your working capital burn rate. Here are the other two.
What are the financial drivers of your business?
Every business has what I call financial drivers. If you don’t know yours, you may as well be driving a car without an instrument panel on your dashboard. You don’t know how much fuel you have, whether your engine is overheating or whether your oil is getting low. It’s the same with your business. Various businesses respond differently to a given intervention. In other words, some businesses are volume driven – they perform better the more goods they sell. Others are margin driven – they don’t necessarily need to grow at the same rate, but they make more profit on the items they sell.
How your business responds will depend on a number of factors including the current size of your business and your breakeven level. Some businesses require large amounts of working capital such as stock and debtors, and can therefore respond well to small improvements in working capital management. Others may have what is called a lazy balance sheet, with a number of underperforming assets. The key is to understand your key financial drivers – changes in these areas will give you the biggest bang for your buck.
The key measure of business performance
Finally, you need to focus on my one key measure of financial performance. In my view, this is Return on Capital Employed (ROCE). Understand how much capital you have invested in your business and focus on deriving an acceptable return on that. If your ROCE is not acceptable, you’ll know where to focus your attention. Ask yourself the following questions include:
Is your profit margin too low?
Does your sales need to grow?
Are you expenses too high?
Do you have poor working capital management?
Do you have a lazy balance sheet?
Are you paying suppliers too quickly?
The answer is usually there somewhere. You just need to know where to look. Often business owners let their heart rule their head but unless they remember that they also have capital invested in the business and act in a mercenary way, they could end up with a broken heart and zero capital.
Grant Field, Managing Director, MGI South Queensland and Executive Chairman, MGI Australasia