Financial Fundamentals Part 3

“The longer I go on, the more I am aware of the power of finance.” – Justin Welby

This is the third and final installment of our series discussing the financial fundamentals impacting the health of your business.

Gross profit is a term commonly used to evaluate a company’s financial health. It measures the amount of money left over from revenues after subtracting what it cost to create the product (called cost of goods sold). This gross profit is the source to pay for all other operating expenses before obtaining net profit. Far too often, businesses do not pay enough attention to the gross profit since it is in the middle of the income statement or profit and loss schedule. The erosion of your gross profit margin can create critical concerns in many other areas of your business, so tracking the amount or ratio over several months or years is very important.

Signs that a company is in financial trouble may include lower liquidity, reduced cash flow, disappearing profit margins, too much debt, slow paying customers, loss of major customers, overdrafts, high-interest loans, layoffs, and many more. Inversely, on a positive note, incremental improvements can be achieved by monitoring your financial and non-financial benchmarks and adjusting your activities accordingly.

Regardless of your trends in one or more of these areas, an honest, objective assessment of your management team, your operations, and the reasons for the company’s existence should be completed to ensure you are achieving your financial goals. Taking the time to reassess strategic positions and business plans, including the capital structure, is wise with the ever-changing business environment and economy. Failure to do so can accelerate a potential crisis or more extreme measures, such as options to sell the business, bring in a new partner, or declare bankruptcy, when some of these options were not planned and elected for the proper reasons.

With more discussions of economic uncertainty building, now is the time to prepare. Although every business or crisis is unique, all should have a common strategy rooted in full transparency and open communication with key stakeholders, both early and often.