Between analysis and action, how can you maintain your company's financial performance?
Even if a company is as successful as it hopes to be 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, will be called into question.
That's why it's so important to learn how to measure your financial performance, so that you can assess the situation and identify areas for improvement.
Setting objectives, defining key performance indicators, monitoring financial KPIs... we explain how to do it in this article!
Definition of financial performance
Working to improve your company's financial performance simply means :
- achieving its objectives in terms of financial results, particularly 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 organisation establish a process for managing and calculating financial performance. This will involve a significant amount of data analysis and comparison between actual and forecast figures, 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 monitor a company's financial performance, because money is the lifeblood of any business!
For example, we know that a negative cash position can end up causing a company to lose its business in the long term, particularly if 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 organisation, 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 financial footing, so that you can more easily attract the funding you need to grow your business.
☝️ Of course, winning the confidence of your investors means making the right strategic decisions, but it also means being transparent by communicating essential information, for example through financial reports.
Becoming more competitive
Finally, when its finances are in good shape, an organisation can more easily access the funds it needs to :
- innovate
- invest ;
- communicate more and develop its marketing
- develop other activities and penetrate other markets, etc.
In short, it has enough money to raise its profile 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?
Setting objectives is the first thing to do when it comes to performance.
And with good reason: they 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 demoralising the troops.
That's why we recommend that 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.
- Penetrate two new regional markets to expand its 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 organisation'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 objectives, it's best to start from what already exists. We therefore advise you to carry out an analysis of your financial situation beforehand , so as to identify areas of weakness and opportunities for improvement.
Step 2: Establish key financial performance indicators
Key performance indicators are vitally important: by providing tangible measurements, they help you to check whether you are on track to achieve the objectives you have set.
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, when you select them you need to :
- Understand the key factors in your success (and keep a close eye on them!) in achieving your objectives;
- Ensure that the indicators are measurable, i.e. that they can be quantified objectively;
- consider the availability and reliability of the associated data.
💡 What are the financial performance indicators? For example, if you are aiming to increase your sales, the KPIs to observe could be:
- the number of new customers ;
- their retention rate
- the rate at which leads are converted into 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 makes all the relevant data available to stakeholders in real time.
To make it easier to read and interpret the results, it must be :
- clear and concise, with a limited number of indicators ;
- graphic, to make it easier to understand the key information; and
- hierarchical, which means that the most important data should be positioned higher up;
- easily accessible to all levels of the organisation.
Financial performance: example of a dashboard:
On the other hand, you will 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 solution, for example), then makes it reliable. From there, you can build personalised, visual dashboards, with the indicators of your choice updated in real time. And all your dashboards can easily be shared with all the staff concerned!
Step 4: Analyse performance and gaps
Sometimes there are big differences between what you hope to achieve and what actually happens!
But if these discrepancies are a cause for concern, they provide interesting elements for analysis, enabling you to identify what's going wrong in your current operations.
👉 For example, an increase in bad debts or late customer payments has a negative impact on the company's cash flow and overall income. There may 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 organisation.
😀 The good news is that the discrepancies observed are sometimes 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
Analysing the gaps is all very well, but taking concrete action to rectify the situation is even better!
These are generally operations aimed at :
- Reducing costs by eliminating unnecessary expenditure and optimising 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
- an improved marketing and communications strategy
- improving customer satisfaction;
- upselling and cross-selling, etc.
- optimising cash management, in particular by reducing payment times and putting in place a solid process for recovering unpaid debts.
☝️ In all cases, your plan will need to be prioritised in order to focus on the actions that are most likely to achieve your objectives, while taking into account your resource and schedule constraints.
Step 6: Reassess your strategy as necessary
By automating the monitoring of your KPIs with software, it becomes much easier to make the task of analysing 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 ensure that you achieve your objectives without going off course 🛣️.
What should we remember about financial performance?
Every company has a duty to make financial performance one of its top priorities. If it doesn't adopt this mindset, it runs the risk of simply losing attractiveness and stability, or even going out of business.
But to stay in the race, you need to know where your organisation really stands. And that inevitably involves regular monitoring of your KPIs, determined according to the financial targets you want to achieve.
Fortunately, there is software to support you in this task: it gathers the necessary data for you and helps you to translate it into dynamic, up-to-date dashboards.
Once you've been relieved of these tedious tasks, all that's left for you 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