Between analysis and action, how can you maintain your company's financial performance?
No matter how successful a company is with its customers... it's nothing without solid finances! If a company's financial performance is poor in terms of real profits, its growth, and even its very survival, may be jeopardized.
That's why it's so important to learn how to measure financial performance, so you can assess the situation and identify areas for improvement.
Setting objectives, defining key performance indicators, monitoring financial KPIs... we explain how in this article!
Defining financial performance
Working for your company's financial performance simply means :
- achieving financial performance objectives, particularly in terms of profits;
- while making intelligent use of available resources, whether human or material.
These objectives are of various kinds, but they generally revolve around :
- profitability;
- development and growth;
- increasing the company's market value .
☝️Au In view of the stakes involved, we recommend that every organization establish a process for managing and calculating financial performance. This will include extensive data analysis and comparison between actual and forecast, with a view to making the best strategic decisions.
How important is a company's financial performance?
Gaining agility in an unstable economic climate
It's essential to keep a close eye on a company's financial performance, because money is the lifeblood of any business!
We know, for example, that a negative cash flow can lead to a company's downfall in the long term, as it is no longer able to meet its immediate obligations (payment of suppliers, salaries, etc.).
It is therefore important to monitor various financial indicators with the utmost regularity, not only to assess the viability of the organization, but also to react promptly in the event of a problem.
Ultimately, good performance management is the key to greater agility in an economic context where risk and unforeseen events are unfortunately part of the equation.
Attracting investors and financing
Unsurprisingly, investors and other lenders attach great importance to a company's financial performance when making their assessments. That's why it's so important to have a solid foundation to help you attract the financing you need to grow your business.
☝️ Of course, gaining the trust of your investors requires not only making the right strategic decisions, but also demonstrating transparency by communicating essential information, such as financial reports.
Becoming more competitive
Finally, when finances are in good shape, it's easier for an organization to have the funds it needs to :
- innovate;
- invest ;
- communicate more and develop its marketing;
- deploy other activities and penetrate other markets, etc.
In short, it has enough money to increase its influence with consumers and really stand out from its competitors.
How can you improve your company's financial performance? The 6 steps
Step 1: Identify your financial objectives
Why is this important?
When it comes to performance, setting objectives is the first thing to do.
And for good reason: they're what show you where you're going 🏃. Not to mention the fact that it's an excellent motivator for teams. So don't be afraid to be ambitious...
... while remaining realistic, of course. Otherwise, you risk demoralizing the troops.
That's why we recommend you set SMART objectives:
- Specific;
- Measurable
- Attainable;
- Realistic;
- Time-defined.
Some examples of financial objectives
- Profitability objectives:
- Increase net profit margin by 10% by the end of the year.
- Achieve a 15% return on investment (ROI) on a new product development project.
- Growth objectives:
- Increase sales by 20% over the next three years.
- Enter two new regional markets to expand geographical presence.
- Cash management objectives:
- Reduce the accounts receivable conversion cycle from 30 to 20 days to improve liquidity.
- Maintain a cash reserve equivalent to three months' overheads to ensure financial stability.
- Capital structure objectives:
- Reduce the organization's debt-to-equity ratio by 50% by repaying part of the existing debt.
- Increase the proportion of equity in the capital structure to 70%.
💡 Tip: to set the right goals, it's best to start with what already exists. In this case, we advise you to carry out a prior analysis of your financial situation, so as to identify areas of weakness and opportunities for improvement.
Step 2: Establish key financial performance indicators
Key performance indicators are of the utmost importance: by providing tangible measurements, they help you to check whether you are on track to achieve your pre-defined objectives.
What's more, these metrics, which are generally simple to communicate and interpret, encourage employee commitment and accountability.
So, if you're spoilt for choice when it comes to KPIs, you need to select them :
- understand the key success factors (to keep a close eye on!) for achieving your objectives;
- ensure the measurability of indicators, i.e. their ability to be quantified objectively;
- consider the availability and reliability of associated data.
💡 What are the financial performance indicators? For example, if you're aiming to increase your sales, the KPIs to watch could be:
- the number of new customers ;
- their retention rate ;
- conversion rate from leads to customers
- average basket ;
- market share ;
- market penetration rate, etc.
Step 3: Keep a close eye on your KPIs
Once you've chosen your KPIs, monitor them as regularly as possible. But how do you actually go about it?
👉 By building a dashboard that will make all relevant data available to stakeholders in real time.
To facilitate the reading and interpretation of results, it must be :
- clear and synthetic, with a limited number of indicators ;
- graphic, to simplify understanding of key information;
- hierarchical, which implies positioning important data higher up;
- easily accessible to all levels of the organization.
Financial performance: example of a dashboard:
On the other hand, you'll probably have noticed that it seems difficult to monitor your KPIs without relying on technology. Especially if you're dealing with large volumes of data!
Improving a company's financial performance therefore also relies on the use of software, particularly business intelligence software.
🛠️ For example, MyReport, designed for SMEs, automatically collects all your data from the sources of your choice (accounting solutions, for example), then makes them reliable. From there, you can build personalized, visual dashboards, with the indicators of your choice updated in real time. And all your dashboards can easily be shared with all relevant collaborators!
Step 4: Analyze performance and gaps
Sometimes there are big differences between what you hope for and what you actually get!
But if these discrepancies are a cause for concern, they are interesting elements of analysis, thanks to which you can identify what's going wrong in your current operation.
👉 For example, an increase in bad debts or late customer payments has a negative impact on the company's cash flow and overall revenues. It could also be an unexpected increase in production costs, affecting the company's profitability.
In short, there are many different scenarios, and it's up to you to investigate to determine the issues specific to your organization.
😀 The good news is that deviations sometimes go in the "right direction", when there is over-performance. In this case, either you've been too modest when setting targets, or you've spotted a magic formula... to reproduce!
Step 5: Implement an appropriate action plan
Analyzing discrepancies is all well and good, but taking concrete action to rectify the situation is even better!
These are generally operations designed to :
- reducing costs by eliminating unnecessary expenditure and optimizing production. All the while preserving the quality of products and services, as well as working conditions;
- an increase in sales, possible thanks to a multitude of levers such as :
- price increases ;
- development of a new offering ;
- penetration of a new market ;
- improved marketing and communication strategy;
- improving customer satisfaction;
- upselling and cross-selling, etc.
- optimizing cash flow management, in particular by reducing payment times and implementing a robust collection process for unpaid invoices.
☝️ In all cases, your plan will need to be prioritized in order to focus on the most promising actions in terms of achieving your objectives, while taking into account your resource and schedule constraints.
Step 6: Reassess your strategy as needed
By automating the monitoring of your KPIs with software, it becomes much easier to make the task of analyzing financial performance part of an ongoing process.
With agility in mind, we recommend that you reassess your roadmap, your strategy and your priorities as soon as your indicators turn amber... before they turn red! In this way, you can guarantee that you'll achieve your objectives without going off course 🛣️.
What should we remember about financial performance?
Every company must make financial performance one of its top priorities. If it fails to do so, it runs the risk of losing attractiveness and stability, or even going out of business.
But to stay in the race, you need to know where your organization really stands. And that inevitably involves regular monitoring of your KPIs, determined according to the financial targets you want to achieve.
Fortunately, there are software programs to help you with this task: they collect the necessary data for you and help you translate it into dynamic, up-to-date dashboards.
Now that you've been relieved of these tedious tasks, all you have to do is concentrate on the essentials: implementing and managing the action plan that will enable you to maintain your financial performance at the right level.
Article translated from French