If you have been in business for a considerable amount of time, it is likely that your company will go through a difficult time. These harsh stretches could originate either internally or externally. From the inside, it could be caused by a serious breakdown of operational capabilities, lawsuits, thefts, mistakes, or inability to compete on the market. Externally, they could come from contingencies beyond your control such as worldwide pandemics, wars, economic recessions, etc.
Here are 4 things you can do to face these difficult periods and save your company from financial ruin:
1. Determine your Break-Even Numbers
The Break-Even analysis is a critical component of the daily management of a business. Essentially, it establishes the minimum revenue a company must reach to cover its financial obligations or expenses. The Break-Even Point is also referred to as the “Zero-Profit Point”. It is very versatile and can be used to support many managerial decisions especially the tough calls you have to make during a crisis.
2. Develop a Financial Plan
The financial plan will help establish a specific revenue goal to reach your company’s profit goal. It will also help establish maximum spending for each cost line item. With a robust Financial Plan, you can still develop a pathway to not only remain operational, but also earn a profit at the end.
3. Develop a Spending Plan
The Spending will help you determine the optimum spending limit for any revenue projection. Thus, if you anticipate a lower income for the next period, the Spending Plan will help manage the finances of an organization with a simple plan that is easy to follow and implement. The Spending Plan will also help eliminate over-spending which occurs in most organizations.
4. Develop a Comprehensive Budget
A comprehensive Budget will help determine the minimum revenue amount you will need for the following period to remain operational while at the same time being able to pay for probable and unknown costs.
An ideal budget includes the development these three sections:
• Common Costs: Determines how much you would need at a minimum to be operational for the following period
• Probable Costs: Determines specific costs that you may to incur for the following period. Essentially you know what these potential costs are but are unsure if you will incur them.
• Unknown Costs: You should also add an unknown factor percentage which will simply apply a percentage from the total of your common and probable costs. This Unknown Cost is usually reserved for costs that cannot predicted ahead of time because they are unusual, rare, and simply unknown. They may include costs such as fire, legal fees because of a lawsuit, breakdown of a machine, accidents, etc.
The Compensation Analysis examines the financial burden and contribution of employees in an organization. Many decision makers tend to ignore the compensation analysis and it is to their detriment for long-term success.
Performance Management measures the efficiency of the business and financial systems of a company. It also serves to enlighten possible areas of concern that may be detrimental to the organization’s smooth operation and financial profitability.
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Growth Management is the process in place to ensure that the company’s market value increases on a consistent basis.
The following key tenets will ensure growth on a long-term basis:
The financial analysis enables the decision-maker to review the financial information of the company and make the best decisions. It should be unacceptable to manage any operation or project without fully understanding your financial position.