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7 Unhealthy Financial Trends That Could Break Your Business

03 Jul 2017






If you are trying to figure out whether your business is financially healthy, have a look at your financial trend analysis. If you spot one of the seven unhealthy financial trends, consult with your financial advisor before it breaks your business.

What is trend analysis?

Trend analysis evaluates the financial health of your business in a given period of time.
 
The objective is to calculate two things that compares one period to the next:
  1. Amount change
  2. Percent change
 
Then, run an analysis of this data.
 
Let’s use the lecture data from Flatworld Education, Inc., to study the anatomy of trend analysis
 
At the end of this section, we have performed trend analysis that gives us the data to evaluate a company’s financial information.

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Source: Flatworld Education, Inc.
 
What do you see in the data above? It looks like Coca Cola’s operating income increased from 2009 to 2010. 
 
To evaluate the company’s performance, let’s calculate the exact dollar amount of that change. Then, we move to calculating the percent change.
 
Here’s the key equation to calculate the dollar amount of change for your quick reference —

Financial Trend Analysis

Source: Flatworld Education, Inc.
 
The equation that you are seeing above is that Coca Cola’s operating income increased by the amount of $218,000,000 from fiscal year 2009 to 2010. That’s a huge amount.
 
But the real question is: How significant is the increase in Coca Cola’s operating income?
 
The only way to determine the real significance of the amount change is to calculate the percent change for the same period.
 
Here’s the key equation to calculate the percent change for your quick reference —

Financial Trend Analysis

Source: Flatworld Education, Inc.
 
The result of calculating the percent change in Coca Cola’s operating income as shown above takes us back to the question: How significant is the increase in Coca Cola’s operating income?
 
Well, we can begin with the fact the 2.6% is a positive number. While it is not extraordinarily significant, it remains a positive result for the company.
 
Now that you understand what trend analysis is all about, let’s move on to have a look at the unhealthy trends you should watch for in your financial statement.
 
You should also read:
 

7 Unhealthy Financial Trends To Watch For

Your business success heavily depends on your business financial health. As the popular saying goes—
 
“If you are not growing; you are dying.”
 
If your financial analysis shows unhealthy signs, your business could be in trouble and you should be taking immediate actions to gain back positive momentum.
 
As you perform your financial trend analysis and you spot any of the seven unhealthy trends that we discuss below, you must take immediate action. If you are uncertain, it is best to consult with a professional financial advisor that you can trust to help your business recover and steer it towards the direction of business success.

 

Trend 1. Growing expenses faster than revenue

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Insights: If expenses are growing faster than revenues, your business is not sustainable in the long-term. The obvious reason is that you are spending more than you are earning; and if that’s the case, you will soon run out of money.
 

Trend 2. Constant expenses but dropping revenue

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Insights: If your revenue is dropping, you should not be spending the same amount of expenses due to the fact that a portion of your expenses are incurred only when you are providing the product or service, or what we refer to as direct variable cost or cost of goods sold.
 

Trend 3. Growing expenses fast as revenue

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Insights: If expenses are growing as fast as the revenue, it means that your business has not identified cost-efficiency opportunities and not able to achieve business efficiency.
 

Trend 4. Gross Margin Decline

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Insights: If revenue is growing faster than gross margin, the company is actually losing ground as it grows. Companies in this condition should stop revenue growth and should focus on underlying costs (specifically on COGS) and figure out if costs are too high or prices are too low. The underlying problem should be fixed before the company pushes for growth.

 

Trend 5. Slow revenue growth compared to industry average

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Insights: You should always check out how your business is doing compared to industry average to identify any missed opportunities that competitors are able to seize and were paying off.

 

Trend 6. Growing revenue, dropping cash flow

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Insights: If your revenue is growing, your cash must be growing as well. If not, it means that the company is not able to strategically allocate cash resources or preserve its cash resources and spend on those that generate the highest return on company’s investment.

 

Trend 7. Dropping revenue and dropping cash flow

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Insights: If company’s cash flow is dropping at a faster rate than the revenue, it will only be a matter of time before the business closes shop. Cash is king.

 

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Here’s a clip from the SCORE Houston business workshop event where Cristy Fontanilla discussed the key financial indicators that every small business owner should know.

If you missed the seminar, you can request to watch the full video by emailing cristy@fas-accountingsolutions.com.

 
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References:

Kurt Heisinger and Joe Hoyle. “Managerial Bookkeeping, v. 1.0.” Flat World Inc., Retrieved on March 13, 2017 from http://catalog.flatworldknowledge.com/bookhub/reader/4402?e=heisinger_1.0-ch13_s01


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