5 Key Financial Data Points that Inform Business Strategy
With any business, money comes and goes. You have income and expenses, and for a company to be successful, the former must outweigh the latter. With that said, even small to mid-sized businesses understand that a fluid financial situation is far more complex. There are a few simple things to consider like allocations for payroll and suppliers, along with the value of materials yet to be used for production and merchandise that needs to be sold.
There are expenses like marketing that should amount to payoff to increase customer support or training for employees that equates to greater efficiency and profitability, for example. You have money in the bank, interest on investments, and funds coming in through the pipeline. Managing a company's finances is no easy task, which is why most companies eventually require assistance from outsourced accountants to keep things on track.
Still, business owners need to have at least a modicum of understanding of where their finances stand to measure performance and create sound business strategies moving forward, which means incorporating specific financial data. Here are just a few of the most critical financial data points every company should use to inform their business strategy.
Profit
Revenue is the cash coming in. Profit is the portion you earn minus expenses. It’s an essential distinction for business strategy purposes because the money you have left after you’ve factored in expenses is the extra you have to reinvest in your business. If you’re looking to grow, your profits are the key to determining what steps you can take now and in the long-run.
Revenue Growth
Here’s a simple question: how much money do you have coming in? Is your revenue growing over time, and if so, at what rate? How many clients/customers contribute to your income, and is any single client contributing a large percentage (potentially signaling a problem if that client stops purchasing)?
How does your revenue average out against your payroll – in other words, how productive are your employees? Strategic planning purposes need to have a good handle on your revenue and the growth over time and anticipated development. Without a sound basis for future revenue, it’s hard to plan for future growth.
Capital Efficiency and Solvency
Lenders and investors are interested in your company's capital efficiency. This number quantifies that your business operations are generating revenue for your investors. Return on equity (ROE) divides net income by shareholder equity). Your debt to equity ratio, debt divided by equity, indicates how heavily your operations are leveraged and should not exceed a reasonable balance for your business.
Liquidity
Money moves fast in business, and a lot of your company's value may be tied up in products. Liquidity is how much cash you have on hand or can get your hands on immediately. Why is this important? Liquidity impacts your ability to pay off liabilities, but more importantly, it plays a role in getting loans. Many businesses rely on periodic lending to stay afloat during a slow season or scale their business. If your liquidity is insufficient, your business may represent too big of a risk for lenders, which could seriously impact your ability to gain needed funds through loans to move forward with planned strategies.
Operational Efficiency
Operational Efficiency isn’t a data point many business owners would list as crucial when forging a business strategy. Still, the relative efficiency with which you’re using your resources could have a significant impact on your revenue and profitability, among other points, so it’s one you really shouldn’t overlook. How fast are you moving inventory? How effectively are you managing customer accounts?
If your operational efficiency is low, it could inhibit growth, which could inform your ability to obtain needed investments or lending. This, in turn, could impede your ability to achieve strategic goals.
Always avoid including any figures that are not explained, backed up, and otherwise researched extensively, especially when it comes to assumptions you've made. Use data from current and past markets and financial situations to substantiate your numbers. If you run into problems, look towards an outsourced CFO or accountant who can review your numbers and advise you on a solid strategy.
