[PODCAST] Basic tips for making a financial diagnosis
Posted: Wed Dec 18, 2024 8:54 am
In this new episode of the Sage Advice Podcast, “Business management as a key to success,” I want to talk to you about a basic element of good management: carrying out a correct financial diagnosis to know how your company faces the passage of time.
A good financial diagnosis is key to properly controlling your business.
Learn the key points you need to consider when analyzing your business's accounting information with the Sage Advice Podcast.
In every business, there dominican republic email list are two types of financial movements. One is financing and involves bringing resources that the company does not yet have into the present. The other is investment and aims to obtain returns in the future.
Therefore, you cannot think of a good diagnosis without analyzing three basic aspects:
What characteristics do your investments have (past and expected returns, risks, liquidity conditions, etc.)
How they have been financed (leverage, returns required by different financing providers, etc.).
How money moves (treasury operations).
Start of marked textSHARE! How does your business cope with the passage of time? Start September by doing a financial diagnosis. We tell you the keys!End of marked text
The most important thing, the data
Once we have a clear objective, we need 'raw material' and 'machinery'. The 'raw material' will be the data. The 'machinery' must be, in these times, a cloud solution that, like Sage Active , allows you to easily invoice and collect payments, keep basic accounting or control the stock of your products and services.
It is important to have a comprehensive view. There is little point in highlighting very specific aspects of the financial diagnosis if you have very significant shortcomings in other areas. Balance will always be a guide.
For example, we sometimes sacrifice opportunities to obtain higher returns in order to keep risks within manageable levels. The same goes for treasury, where seeking too much slack will hinder the profitability of your business, but having too little can condition your payments and can even 'condemn' you to temporary insolvencies that, if not managed well, can cause your company to lose credibility.
Check out the main indicators
The usual procedure is to calculate different indicators of results , cash flows, periods, etc. and then analyze different types of ratios with them. On the one hand, you have the profitability ratios, both financial and economic. They relate the resources used with the results obtained.
Generally speaking, it is usually good news when they are at high levels. However, you should not disregard investment opportunities just because they reduce the profitability of the business. For example, in mature activities, expansions are usually carried out in segments that can provide benefits that, although lower than usual, still compensate.
The same thing happens when what you are looking for or what you have already done is to open doors for the future. There are investments that, in the short term, do not seem profitable, but which may be a requirement for developing others that are. For example, sometimes your company may find itself in a situation of having to face excess capacity in order to be able to opt for certain clients and contracts. Perhaps today there are some idle resources, but you must analyze the entire background of the operation to know if the sacrifice of profitability makes sense .
A second category of ratios that will interest you will be those that analyze financing. They look at the relationship of equity and liabilities to other balance sheet items .
Among other things, you will analyze whether your company's financial leverage is correct and whether the working capital is sufficient, insufficient or too generous. It is therefore a question of proportions.
In this case, as in others, the balances are highly dependent on the context. For example, a business that collects cash and pays in installments can afford to have a smaller working capital.
Business treasury
A third category of financial ratios is the one that studies the cash flow of the business. You will relate the different items of current assets with those of current liabilities. In short, they measure the ability to make payments, but with an eye to avoiding cash surpluses.
And we come to the million-dollar question: where are the optimal values to put all the ratios into context? What we are looking for is to find the 'meter' that allows us to diagnose the strengths and weaknesses of our business's finances.
The answer usually comes from a combination of sources. On the one hand, you can consult financial analysis manuals, which give ideas about optimal values. It is a theoretical framework that you can always refer to. You will see that these ratios usually fall within certain ranges, but there will also be explainable exceptions.
A good financial diagnosis is key to properly controlling your business.
Learn the key points you need to consider when analyzing your business's accounting information with the Sage Advice Podcast.
In every business, there dominican republic email list are two types of financial movements. One is financing and involves bringing resources that the company does not yet have into the present. The other is investment and aims to obtain returns in the future.
Therefore, you cannot think of a good diagnosis without analyzing three basic aspects:
What characteristics do your investments have (past and expected returns, risks, liquidity conditions, etc.)
How they have been financed (leverage, returns required by different financing providers, etc.).
How money moves (treasury operations).
Start of marked textSHARE! How does your business cope with the passage of time? Start September by doing a financial diagnosis. We tell you the keys!End of marked text
The most important thing, the data
Once we have a clear objective, we need 'raw material' and 'machinery'. The 'raw material' will be the data. The 'machinery' must be, in these times, a cloud solution that, like Sage Active , allows you to easily invoice and collect payments, keep basic accounting or control the stock of your products and services.
It is important to have a comprehensive view. There is little point in highlighting very specific aspects of the financial diagnosis if you have very significant shortcomings in other areas. Balance will always be a guide.
For example, we sometimes sacrifice opportunities to obtain higher returns in order to keep risks within manageable levels. The same goes for treasury, where seeking too much slack will hinder the profitability of your business, but having too little can condition your payments and can even 'condemn' you to temporary insolvencies that, if not managed well, can cause your company to lose credibility.
Check out the main indicators
The usual procedure is to calculate different indicators of results , cash flows, periods, etc. and then analyze different types of ratios with them. On the one hand, you have the profitability ratios, both financial and economic. They relate the resources used with the results obtained.
Generally speaking, it is usually good news when they are at high levels. However, you should not disregard investment opportunities just because they reduce the profitability of the business. For example, in mature activities, expansions are usually carried out in segments that can provide benefits that, although lower than usual, still compensate.
The same thing happens when what you are looking for or what you have already done is to open doors for the future. There are investments that, in the short term, do not seem profitable, but which may be a requirement for developing others that are. For example, sometimes your company may find itself in a situation of having to face excess capacity in order to be able to opt for certain clients and contracts. Perhaps today there are some idle resources, but you must analyze the entire background of the operation to know if the sacrifice of profitability makes sense .
A second category of ratios that will interest you will be those that analyze financing. They look at the relationship of equity and liabilities to other balance sheet items .
Among other things, you will analyze whether your company's financial leverage is correct and whether the working capital is sufficient, insufficient or too generous. It is therefore a question of proportions.
In this case, as in others, the balances are highly dependent on the context. For example, a business that collects cash and pays in installments can afford to have a smaller working capital.
Business treasury
A third category of financial ratios is the one that studies the cash flow of the business. You will relate the different items of current assets with those of current liabilities. In short, they measure the ability to make payments, but with an eye to avoiding cash surpluses.
And we come to the million-dollar question: where are the optimal values to put all the ratios into context? What we are looking for is to find the 'meter' that allows us to diagnose the strengths and weaknesses of our business's finances.
The answer usually comes from a combination of sources. On the one hand, you can consult financial analysis manuals, which give ideas about optimal values. It is a theoretical framework that you can always refer to. You will see that these ratios usually fall within certain ranges, but there will also be explainable exceptions.