3 questions that lead to better financial management
When the economy softens and costs rise, most small and midsize businesses need to take a hard look at how they manage cash flow as well as monitoring the right key performance indicators (KPIs).
Many leaders are well aware of this reality. Vistage polled 1,463 CEOs from small and midsize businesses in the Q2 2019 Vistage CEO Confidence Index survey, and nearly two-thirds (64%) of leaders said they anticipate increased revenues in the next 12 months. However, with rising costs expected to eat into profits, only 54% of those CEOs foresee increased profitability in that same period — making financial management a top priority.
How do you know if your financial management is in top shape or needs some fine tuning? Start by asking yourself these three questions.
1. What are you spending money on this year?
If you’re making investments this year, scrutinize the return on investment (ROI) and the implications for your cash flow. According to our survey, 40% of CEOs plan to increase spending on fixed investments, while 46% expect investment spending to remain the same. Only 13% of firms plan to make cutbacks.
Most small and midsize businesses say they plan to invest in technology to either expand their business or increase the efficiency and productivity of their business. That’s not to say that you should spend the same way. But your spending should be based on your unique business goals and financial state, and not necessarily based on what your competitors are doing.
2. What KPIs best capture your profitability?
While revenue, profitability, and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) are common metrics for measuring performance, you may want to consider whether there are other KPIs that better capture your company’s trajectory and provide a clear and current picture of its performance.
For example, if you’ve recently introduced a new product, start tracking KPIs that reflect the performance of that product so you know immediately whether it needs to be tweaked. It’s also a good idea to track metrics that can predict a slowdown in volume so you can take action proactively. For example, a decrease in customer inquiries may indicate that your pipeline is too lean and it’s time to enact cost-cutting measures.
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3. What action can you take now to protect the bottom line?
To cope with cost pressures, you may want to look for new suppliers, consider onshoring or simply implement cost-reduction efforts. Another strategy is to raise prices, which the majority of CEOs (54%) said they plan to do in 2019.
Again, careful monitoring of your KPIs will help you determine what action to take, and when to take it.
This article was originally published in Inc.com on September 4, 2019.