Making good business decisions requires good information.

Not having enough of the right information at the right time increases uncertainty and risk, creating the kind of stress and worry which makes decision-making even harder.

Profitability and cash flow go hand-in-hand; profitability is pointless without a strong positive cash flow, whereas a business with strong positive cash flows cannot continue indefinitely without adequate profitability.

Taking a logical and structured approach to your information needs lets you focus on what's important. Drill-down analysis reveals the critical operational and strategic factors which can be adjusted to improve profitability and cash flows, and to predict the effect of adjustments, so that actions with the most impact can be selected.

Financial Management: Cash Flow

If all transactions were instantaneous, this wouldn't be necessary. In simple terms, the cash low lags, and therefore the business's working capital, requires an analysis of how much Profit and Loss activity takes place via the Balance Sheet.

For example, a lag on Sales (Profit & Loss item) appears in the Debtors (a Balance Sheet item), the lag on the Cost of Goods Sold appears in the Inventory, the lag on Expenses appears in Accounts Payable. And the amount of Cash on Hand is the net effect of all the transaction lags, which is why forecasts are required in order to predict and plan for the finance needed for future operations.

Improvements in cash flow are brought about by understanding and measuring the effect of the root causes of cash flow lags. It's a systematic process of measurement, adjustment and feedback.

Financial Management: Profit Improvement

Likewise, total costs reveal little. What's important is understanding the cost causes, and apportioning those costs to segments or products to determine true profitability.

Allocating costs in this way can be very revealing; high margin products or services may not be as profitable as they seem after all costs are taken into account. This can be achieved with the reporting of business segments. More here.

How Much Profit is Enough?
Knowing the absolute level of profitability is a first step. For decision-making, the context is needed, for example:

The answers to such questions can lead to a decision to drop a particular product or service, for example, or to change credit approval criteria, or alternatively raise more questions, leading to a more detailed analysis.

If profitability is less than industry averages, a drill-down scrutiny of cost factors might reveal inefficient selling practices, or poor buying terms.

Corrective management decisions will be the result, which could range from small operational adjustments to major strategic decisions.

Getting access to the right information depends on:

• Having an efficient computerised accounting system with office procedures and a chart of accounts which meets the information needs of the business
• Having the bookkeeping up to date and accurately entered
• Having financial statements available regularly and promptly after the end of each period, and presented in a form which is easily understood, and reflecting the key performance indicators
• Having the ability to quickly and easily forecast the business trends, the effect on the forecast of changes in key variables, and seeing the forecast compared to actual business results as they come through