Just looking at a bottom line profitability figures or an employable cash balance may work well for small and unsophisticated businesses, but as the business develops a more detailed analysis is required.
For example, an overall profit figure may hide the fact that one part of the business may be profitable, while another part is not.
This situation may be holding the whole business back. Recognising and then removing the unprofitable part of the business may free up vital cash and resources that the business can use to expand in the profitable areas.
Equally, examining costs in the light of individual strands of business can reveal expenditure that can be cut. This may well be the difference between one area of business being profitable and not.
When looking forward at the strategic aims of the business it is also necessary to examine the financial underpinning of the plans.
If you do not have the finances in place to handle substantial growth then setting too ambitious a growth target with your sales team may actually be dangerous.
In other words, if you get what you wish for without the financial underpinning to manage the operational growth needed, you may end up running out of cash and killing the business.
The financial measures you have in place should therefore allow you to foresee future risks and opportunities.
You need to put measures in place that clearly draw out the costs and profit associated with each area of business.
When you fully understand your costs and how they contribute to the various strands of your business then you can plan with confidence.
