If you are trying to figure out whether your business is financially healthy, have a look at your business’ financial trends. If you spot one of the seven unhealthy financial trends, consult with your financial advisor or part-time CFO on corrective actions to take before it is too late to save your business from financial turmoil.
What is trend analysis? Trend analysis involves the collection of information from multiple time periods and plotting the information on a horizontal line for further review. The intent of this analysis is to spot actionable patterns in the presented information.
Here are the 7 Unhealthy Financial Trends:
Trend 1. Expenses Growing Faster Than Revenues
If expenses are growing faster than revenues, it is important to further analyze the major expenses and most importantly why these expenses are growing faster than revenue. Identify the fixed cost, the variable costs and their impact on the bottom line.
Trend 2. Constant Expenses But Dropping Revenue
If your revenue is dropping, you should reduce the amount spending 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. This requires that expenses should be matched against the revenue.
Trend 3. Growing Expenses Fast As Revenue
If expenses are growing as fast as the revenue, this usually means the company is investing in growth. Examples are research and development of new products and adding more salespeople.
Trend 4. Gross Margin Decline
Declining gross profit margin is a significant problem for a for-profit business. Understanding factors that contribute to margin decreases put you in a better position to react positively. One of the simplest factors that can lead to declining margin is higher costs of goods sold. Lowering your prices to generate sales can also reduce gross profit margin.
Trend 5. Slow Revenue Growth Compared to the Industry Average
Sales are the lifeblood of any company. Comparing a company against its industry or sector median shows how strong a company’s growth is relative to the growth of its peers. Though this analysis can be helpful, the difference between a company and its peers can be considerable, so make sure you understand how a company differs from other firms in the same industry or sector when making these comparisons.
Trend 6. Growing Revenue, Dropping Cash Flow
If your revenue is growing, your cash must be growing as well. If not, it means that the company is not able to convert the credit sales into cash for a given period of time. Also, the company might not able to strategically allocate cash resources accordingly.
Trend 7. Dropping Revenue and Dropping Cash Flow
Dropping of revenue will lead to a lack of cash. But, businesses with cash reserves from previous revenue or cash injections can survive without an increase in revenue for a while. But a consistent drop of revenue for a length of time will eventually catch up to you, regardless of how small or large your cash reserves. It’s essential to uncover the cause of the continuous dropping of revenue and address them as soon as possible.
To know more on how to figure out whether your business is financially healthy, as well as help in getting powerful financial insights, help in achieving diligent tax compliance, and help in achieving a healthy cash flow, contact us today at email@example.com or 832-437-0385.