We want to share Qokoon’s simple financial analysis method with business owners, CEOs and CFOs to help you better understand your finances and take appropriate actions to grow and protect your company.
Are you on top of your finances?
- What were your profits last month and year to date?
- What is your profit margin?
- What is your operating cash burn?
- Are your profits and profit margins increasing or decreasing? Why?
Many entrepreneurs, CEOs and even finance directors don’t know the answer to the above simple questions. This is dangerous.
Understanding what has happened and why in the past will give you the knowledge to better prepare for the future.
The need to understand
When it comes to the performance of your company you should know what has happened and why. Do you? If you don’t, you are driving blind and heading for a crash.
Understanding your finances is not difficult. You just need some basic knowledge and a structured approach.
Once you understand what has happened and why, you can take the right actions to grow your business and protect your company.
Essentially, you want your company to (i) grow, (ii) be profitable, (iii) be resilient and (iii) generate cash.
Our approach can help you achieve these goals.
Qokoon’s financial analysis method
Your financial information is summarized in three accounts (P&L, BS and CF). When trying to understand your company’s performance and status you should focus on three main areas, which are linked to your company accounts:
- Growth and Profitability (P&L)
- Strength and Resilience (BS)
- Liquidity and Cash Generation (CF)
We believe that Key Performance Indicators (“KPIs”) are valuable. However we see many companies monitoring too many KPIs which may be confusing and may result in (i) lack of focus on what really matters, (ii) inability to understand your performance and strength and (iii) failure to make the right decisions (or even worst, make decisions that will damage your company).
To avoid the potential issues with the management-by-KPIs method, Qokoon’s approach focuses on two simple questions about a small number of financial parameters:
- Question 1 – What has happened? (e.g. my profits have declined by 25%)
- Question 2 – Why has it happened? (e.g. why did my profits declined by 25%)
Once you have understood what has happened and why, you can decide on an action plan.
The table below shows an example of Qokoon’s approach for two financial parameters.
Previous Year Month
|Reasons for Change/Comments||Action Points for Improvement|
- Sales declined £3,8m (23%). Mainly, construction division
- Overheads increased £0.2m (10.4%). Mainly salaries (new hires to restructure and plan for growth – Business development and COO)
- Develop business development strategy
- Review pricing policy (do we increase or decrease prices?)
- Identify cost cutting opportunities in overheads
|EBITDA Margin (%)||(0.7%)||
- Decline in sales not matched by the slight reduction in SG&A (fixed costs)
- Direct salaries improvements (lay offs) more than offset by head office hires (COO and business development)
- EBITDA margin should improve as COO identified cost savings opportunities and business development showing results (15 new clients in the last 6 months)
- Improve profit margin by 1% (identify cost savings in cost of sales)
- Introduce efficiency tools in the design department
- Create task force to determine where and how we can use digitalization and AI
Getting the answers to the “what and why” questions above will allow you to:
- Focus on what matters;
- Understand what has happened and why; and
- Take appropriate decisions and actions to improve your company’s performance, strength and liquidity
In the table below we summarize the brief list of financial parameters we like to monitor:
Growth and Profitability
Profit & Loss
(month and year-to-date)
Strength and Resilience
Liquidity and Cash Generations
(month and year-to-date)
|Sales (£)||Cash Balance||CF from Operations (£)|
|Gross Margin (%)||Debt Balance||CF from Investing (£)|
|EBITDA (£)||Debt/Total Assets||Free Cashflow (£)|
|EBITDA Margin (%)||Equity/Total Assets||CF from Financing (£)|
|Net Income (£)||Receivable Days||Total CF (£)|
|Net Income Margin (%)||Payable Days|| |
| ||Stock Days|| |
You can add your own parameters to the table above but make sure you don’t add too many to avoid being overwhelmed and confused. Usually, the answers about a few well selected parameters will point to other parameters/metrics as the explanation of what has happened.
Once you properly understand your financial performance and status you will not only increase your chances of higher growth and profitability but also avoid nasty surprises.
Discipline about asking these two questions every month is the key to proper understanding and improved financial management.
Here at Qokoon, we’ve built a simple software that helps you understand your business finances and communicate them to whoever needs to know in minutes. If you’d like to learn more about Qokoon, or try us on a 30-day free trial, click here.