How to Take Your Business's Pulse
by David H. Bangs, Jr.

Tracking the key trends in your business's performance is critical to growing the business. Which checkpoints should you be monitoring regularly? Here are 10 items you should track monthly for successful operations management:

1. Cash
Changes in cash accounts need close attention. Your goal should be to minimize idle cash yet maintain liquidity. Excess cash may indicate bills not paid, early payments by your customers, new investment, or sale of a fixed asset. Insufficient cash may mean that sales or receivables collection have fallen off, a major asset has been purchased with cash, a bill has been prepaid, suppliers are demanding cash on delivery, or some other problem. For cash management, you may be able to use a system centered on a zero-balance checking account or some kind of investment account. Ask your banker.

2. Accounts Receivable
While receivables are close to cash, they can't be used to pay bills unless you collect them, borrow against them, or sell them. Any change in receivables one month affects the next month's operating cash flow-assuming standard 30-day terms — so an increase or decrease has serious implications.

Receivables rising? Maybe sales are up. Or collection efforts are down. Or the market is shifting towards more extensive use of credit, or sales are being made to a different market segment. Receivables down? This could signal better collections, lowered sales, downturns in the business climate, tightening of credit standards, or higher cash sales.

3. Inventories
If inventories represent a substantial portion of your current assets, this could be a major index of future operating concerns. Lowered inventories tell a different story. Perhaps a reorder point was missed, a line dropped, or an unusual order put pressure on the inventory and replacement stock hasn't yet arrived. Higher inventories could mean a sales slump, careful stockpiling against anticipated production needs, careless ordering, or wise investment against a price rise or shortage. Inventory levels are merely indications. The key is to identify the root cause of inventory that is too high or too low.

4. Current Assets
These are more useful for ratio calculation than for operating purposes, although a sudden change would indicate a need for further examination. Usually a lower inventory, for example, will show up as higher cash or receivables, leaving total assets unchanged.

5. Current Liabilities
If your liabilities fall, you may be retiring debt or paying bills too swiftly, may have forgotten to place an order, or may have missed posting a bill. Or, perhaps cash flow has improved, enabling you to catch up and get ahead of liabilities, take trade discounts, and reduce your costs. Any change from the norm should trigger the question: Why?

6. Total Debt
Changes in debt level (other than new debt) are indirectly tied to operations, but since debt is ultimately repaid from operating profit, you need to keep an eye on it. Your banker will be interested in changes in the amount of debt your company carries. Too much is dangerous; too little may indicate overly cautious financial management resulting in lower sales and loss of market share.

7. Net Worth
If your business is making money, net worth tends to rise. If you're losing money on operations, it falls — and since in many ways net worth is an ongoing report card on overall management, you should monitor it closely. Your banker does.

8. Sales
The implications of fluctuations here are obvious. You know that if sales are steadily rising or falling, your cash flow will change predictably. So will the work flow and other operating concerns; inventories will have to be adjusted, personnel hired or laid off, and so on. However, sales for many businesses are seasonal, and if you don't know the pattern for your business, you could be making unwise decisions.

Sales spurts or dips one month will affect the next month's balance sheet — and the balance sheet items have a direct bearing on the level and profitability of sales you can afford. At least quarterly, you and your accountant or treasurer should carefully examine changes in the balance sheet and in sales and expenses. Ask for a funds flow statement and an explanation.

9. Gross Margin
Almost as important as the sales figure, gross margin (i.e., cost of sales subtracted from gross sales) shows how well operations are being performed. Since the cost of sales goes up or down with sales (usually though not always with perfect synchrony), the amount of revenue available to meet fixed expenses is governed by gross margin. Careless production, for example, will show up as higher cost of sales. Sloppy work flow, careless ordering of raw materials, and short-term cost problems tend to cluster here. Lower margins should be a red flag-unless there is a good reason for the change, such as increased training costs.

10. Net Profit
The bottom line. If the trend is upward, good. If not, bad. And in either case, changes call for asking why. However, constant attention to short-term profit is foolish. While you would normally want constant profitability, some costs that affect short-term profits are not that onerous in the long term. Such costs might include new debt service, training costs for new personnel, or administrative costs to establish a new branch office. In light of these costs, borrowing from short-term profits to insure long-term profits can be a good thing.

David H. Bangs, Jr., is author of the best-seller, Financial Troubleshooting: An Action Plan for Money Management in Small and Growing Businesses.

Copyright © 2000 Inc. Business Resources