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Even if you have been very carefully budgeting and anticipating unforeseen
events prior to business start-up, there is always a risk that things do not
progress as planned.
Deviations from plans
The earlier you identify deviations from the planned development, the better are
your chances to intervene and thus to restore things.
Often a company closes down even though it may have been saved, had the owner
realised the adverse tendency in due time.
Thus, it is of utmost importance that you organise you accounting system in a
way that gives an early mis-development warning.
Budget control
What to keep an eye on comes down to two words:
Of course it provides that you have prepared a budget for your business
activities. A budget showing, in not necessarily highly elaborate figures, your
anticipated turnover, expenses and profit (net income).
Thus, you can monitor the current progress of the critical parameters of your
business by comparing the records to the budget.
Interim statements
If your company is of a considerable size, interim statements may be
necessary, e.g. monthly statements. But even if you, to save time and money,
have chosen not to make interim statements, you can still use the records to
monitor the critical items.
Bookkeeping is difficult to comprehend if you are not a bookkeeper. Thus,
most entrepreneurs frequent their accountant to discuss their business
operations. Such regular meetings are a good protection against danger signals.
Danger signals not pertaining to accounts
Accounts and bookkeeping are not always the best sources of information on
budget variance. In many companies it takes some time for budget variance to
show in the accounts.
Orders
A contract manufacturer (numerous craftsman´s businesses) will typically be
able to anticipate a decline in turnover way ahead due to lack of order intake.
Cost-benefit analysis
Another possible problem is that the development of turnover may look fine,
yet the proceeds from sales are declining. Evidently, this will eventually show
in the accounts. However, this can be identified far earlier if the cost/sales
price ratio is monitored.
Very probably the cash generating ability is retained by an early adjustment
of the sales prices.
Other danger signals
All of the above danger signals are in-house information derived from
bookkeeping, accounts or other internal information.
A completely different set of danger signals can be retrieved from a
company´s external environment. Changes at large customers or suppliers can be
a sign of impending changes in turnover. Social tendencies can be a sign of what
to expect in, say, six months.
Example
A classic example of this: Bond interest fluctuations have a crucial effect on
the activities within the building industry. Therefore, many building
contractors monitor the interest rate development carefully.
Another example: If you deal in international trade, exchange rate
fluctuations can be critical to your company.
Finally, fashion trends, politics, or progress of technology can affect the
growth conditions of your company.
- Go to next
business issue: Financial Assesment
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Copyright © 2009 Dynamic Business Plan 05-02-2012
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