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Financial Control - Danger Signals
If you look for danger signals you will be able to detect them early.
Even if you have been very carefully budgeting and anticipating unforeseen events prior to business start-up, there is always a risk that things do not progress as planned.Deviations from plans
The earlier you identify deviations from the planned development, the better are
your chances to intervene and thus to restore things.
Often a company closes down even though it may have been saved, had the owner
realised the adverse tendency in due time.
Thus, it is of utmost importance that you organise you accounting system in a way that gives an early mis-development warning.
Budget control
What to keep an eye on comes down to two words:
- Budget variance.
Of course it provides that you have prepared a budget for your business activities. A budget showing, in not necessarily highly elaborate figures, your anticipated turnover, expenses and profit (net income).
Thus, you can monitor the current progress of the critical parameters of your business by comparing the records to the budget.
Interim statements
If your company is of a considerable size, interim statements may be necessary, e.g. monthly statements. But even if you, to save time and money, have chosen not to make interim statements, you can still use the records to monitor the critical items.
Bookkeeping is difficult to comprehend if you are not a bookkeeper. Thus, most entrepreneurs frequent their accountant to discuss their business operations. Such regular meetings are a good protection against danger signals.
Danger signals not pertaining to accounts
Accounts and bookkeeping are not always the best sources of information on budget variance. In many companies it takes some time for budget variance to show in the accounts.
Orders
A contract manufacturer (numerous craftsman´s businesses) will typically be able to anticipate a decline in turnover way ahead due to lack of order intake.
Cost-benefit analysis
Another possible problem is that the development of turnover may look fine, yet the proceeds from sales are declining. Evidently, this will eventually show in the accounts. However, this can be identified far earlier if the cost/sales price ratio is monitored.
Very probably the cash generating ability is retained by an early adjustment of the sales prices.
Other danger signals
All of the above danger signals are in-house information derived from bookkeeping, accounts or other internal information.
A completely different set of danger signals can be retrieved from a company´s external environment. Changes at large customers or suppliers can be a sign of impending changes in turnover. Social tendencies can be a sign of what to expect in, say, six months.
Example
A classic example of this: Bond interest fluctuations have a crucial effect on the activities within the building industry. Therefore, many building contractors monitor the interest rate development carefully.
Another example
If you deal in international trade, exchange rate fluctuations can be critical to your company.
Yet another example
Finally, fashion trends, politics, or progress of technology can affect the
growth conditions of your company.
Go to next
business issue: Financial Assesment
Don´t wait for the perfect opportunity. Start taking action, based on what you have readily available: who you are, what you know, and who you know.
- Saras D. Saravethy, professor in entrepreneurship
