3 Minutes Financial Analysis

Google 'financial analysis' and there will be endless way to perform this exercise. Can SMEs / start-ups really have the luxury to start accounting 101 and attempt to meet the expected results from an analysis? In any case, we sometimes do not have a choice. Therefore, SMEs / start-ups often make do with available resources. In this post, we narrowed down 3 crucial factors if you are really time-strapped but wish to quickly analyse your business:

1) Gross Profit Margin [(Revenue - Cost of Sales) / Revenue]

This is often the fundamental driver of a business. It is pointless for a S$10 million revenue company to spend S$9.5 million on cost of its product for sales. Unless there are insignificant overheads, it is almost pointless to be working so hard for this business. On the flip side, this could raise a couple of questions you can ask yourself: Can you increase the price of your products / services? Are you getting the best price for your products? In some circumstances, we even question, are the revenue and cost even accurate?

2) Net Profit Margin (Profit before tax / Revenue)

It is pointless if your overheads ultimately eats up your gross profit (revenue - cost of sales), assuming it is not due to shareholder's remuneration of course (then there is always personal tax planning possible too). Therefore, a check of how many per cent your profit before tax is actually of revenue can be a quick depiction of your profitability. From this you could then pull out key contributors to your overhead and narrow down any specific expenses that you could reduce or exclude one-time expenses unique to certain event to have a more accurate view of your profitability.

3) Accounts Receivable (AR) Turnover Days (365/ AR turnover), where AR turnover = (Total Credit Sales for Period A to B) / ((AR as of A + AR as of B)) / 2)

There are so many ratios out there that you can use to evaluate your operation efficiency but AR turnover days can give you a good sense check of whether you are collecting cash from your customers on a prompt-enough basis. The results (in unit of days) represent how many days your company typically take to collect from an invoice (which in all best situation should be close to the credit terms provided to customers). There is so far you can go with a good gross profit or net profit margin if you are unable to collect the cash from your revenue. Companies usually fail from cash flow issues and this ratio allows you to quickly identify if you need to take quick actions to chase debtors on a more regular basis, stop selling to debtors who are bringing the turnover days up or give you a piece of mind that you are receiving your well-deserved money on time.

The factors by themselves would surely not be meaningful unless there are comparisons. To determine what to compare to, it will very much be based on your goals, akin to how you determine a person's success - are you aiming for self-improvement, sense check of your company against the industry or spotting opportunities? Surely, these are just flavours to financial analysis but if you want to have a quick think about where you are currently, you may wish to try them out. A rule of thumb definitely - drill deeper.

Nevertheless, you need not be alone in this whole process. Have a chat with us on how we can tailor one suitable analysis for your business, at fraction of cost.