Brian Watson & Associates - business improvement specialists for small and mid-sized companies

By: Brian Watson & Associates  09-12-2011
Keywords: profitability, cash flow

Financial performance and profitability assessment

Financial assessments usually fall into one of two categories:

  • problem solving – as a result of a specific performance shortfall or stemming from general profitability concerns or cash flow difficulties
  • change impact assessments – to determine the bottom-line impact of expansion or new business development plans, or product/service changes

BW&A is experienced in both categories. The approach to each is different, but some of the techniques we use apply to both.
In problem solving situations involving specific issues, the goal is to identify where and why a problem has occurred, quantify the scope of the issue and determine the appropriate corrective actions. The process usually involves preparing time-phased projections of the effect of the corrective actions. For general, business-wide assessments, the initial focus is to highlight opportunities for improvement in the overall financial results of the business, whether revenue related, or from increased margins, cost savings and expense reduction, or improved cash flow. This may require a second stage of more detailed review to determine specific action plans.

The review process can also identify areas for improvement in the financial position of the business. This “balance sheet” review generally focuses on three key areas: asset management (such as inventory and receivables), payables management and cash/borrowings position, and may involve an assessment of risk factors.

In most situations, we will start our work with a review and analysis of the financial results of the business. Where necessary, we will supplement the available financial data with additional analysis to provide greater insight into the key performance indicators and to determine which operational issues are affecting these results.

The actual analysis work that is needed will depend on the particular circumstances of our review assignment and may include:

  • analysis of profitability by product/service: can be helpful to identify the impact of product mix where margins vary by type of products/services sold
  • break-even analysis: useful for quantifying causes of declining profitability or margin variances by product type
  • comparison to available industry financial statistics: where industry data is available, this “benchmarking” process can highlight potential areas for improvement
  • sensitivity analysis: useful when assessing the impact on the business of future changes, such as exchange rate movements, interest rates or price increases

These analysis techniques are also used in our change impact assessments, with greater emphasis on sensitivity (“what if”) analysis to determine the range of possible outcomes based on differing forecasts and estimates, and as a risk assessment tool.

When we present our results and recommendations, we address both current and future issues and will indicate where we can assist in the implementation of the recommendations. Our aim is to deliver tangible benefits from our assessments that result in improved profitability, stronger cash flow and reduced financial risk.

Contact us for more information or to arrange a no-obligation discussion of how we can assist your company.

Keywords: cash flow, profitability

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