Business control is imperative for business success, and it works two ways.  First, it helps you improve what you are now doing, and second, it helps you prepare for expansion or change without being caught short of cash.  Business control is a matter of keeping things in balance. 

While there are a number of ways to control your business, some of the best methods involve financial analysis.  It's beneficial for owners to become acquainted with the following four basic financial control techniques:

1.    Trend analysis
2.    Cash position charting
3.    Target statements, and
4.    Accounts receivable aging schedules

In this article we will discuss the first two, trend analysis and cash position charting.

Trend Analysis

Trend analysis is a method for keeping track of month-to-month and year-to-year ratios and expenses.

There are two documents that will aid you in completing a trend analysis.  One is the Data Gathering Form; the other, the Comparison Chart.

The Data Gathering Form

The top of the Data Gathering Form includes the business name, the business address, and the date the form was prepared.

The main body of the Data Gathering Form consists of two columns.  The left column includes the following data: Current Assets, Current Liabilities, Net Sales, Working Capital, Total Debt, Net Worth/Equity, Operating Income, Income Before Taxes, Total Assets, Accounts Receivable, Cost of Goods Sold, Average Inventory, and Fixed Assets.

The right column of the Data Gathering Form includes the Dollar Figures for each of the items in the left column.  Here is what the form looks like:

Comparison Charts

As you gather the monthly and yearly dollar figures for the items in the left column, you can prepare the following four comparison charts:

1.    Month-to-Month Ratio Comparison
2.    Year-to-Year Ratio Comparison
3.    Month-to-Month Expense Comparison, and
4.    Year-to-Year Expense Comparison

The Month-to-Month Ratio Comparison and the Year-to-Year Ratio Comparison are identical, except for the time periods.  One is for months, the other for years. 

The Month-to-Month Ratio Comparison chart compares financial ratios one month to the next over a business year.  The Year-to-Year Ratio Comparison chart compares the financial ratios one year to the next.

The Month-to-Month Expense Comparison and the Year-to-Year Expense Comparison are identical, except for the time periods.  One is for months, the other for years. 

The Month-to-Month Expense Comparison chart compares the expenses one month to the next over a business year.  The Year-to-Year Expense Comparison chart compares the expenses one year to the next.
 

The best time to prepare comparison chart is at the beginning of the business year.  That's when you will label the columns of the month-to-month chart with the appropriate names of the months, and write the year in the appropriate column of the Year-to-Year charts.

Recording the month-end ratios and expenses in the proper columns at the end of each month will start you on a monthly trend for continual analysis and study.

Recording year-end ratios and expenses in the yearly charts will build a yearly trend.   By keeping track, you have a history of how well your business is doing.  The records will help you review your business, analyze its strengths and weaknesses, and plan future action.

In addition to Trend Analysis, a second technique for controlling your business is called Cash Position Charting.
 

Cash Position Charting

One of the most important lessons in business management is this: Never run out of cash!

A lack of cash, even for a short time, can cause all of your work and planning to become worthless.  Even if you are showing a profit on paper, you won't be in business very long if you can't pay your bills.

The Cash Position Chart

A cash position chart will provide immeasurable help in avoiding this situation.  It will help you target when cash will be needed to pay bills and will help you determine where to obtain cash for items such as expansion. 

An estimated cash position chart should be made a year in advance.  A second chart should be used to record actual cash income and outgo on a weekly or monthly basis.  A cash position chart will help you prepare for the day when you will need to talk with your banker about borrowing money. 

Comparing the estimated figures with the actual figures will help you greatly improve your budgeting ability.

A cash position chart has 14 columns.  The first column on the left is a list of the row headings that include:

Starting Cash

Cash-in:
    Cash Sales
    Cash Received
Total Cash-in

Cash-out:
    Purchases
    Rent
    Wages
    Miscellaneous
Total Cash-out

Ending Balance

Cash Position

The beginning amounts are recorded in column 2 of the cash position chart.  The monthly dollar amounts are recorded in columns 3 through 14. 

The Ending Balance of the first month becomes the Starting Cash for the second month, and so forth.
 

The cash position chart can also be used for planning cash positions. 

By using the cash position chart you can keep your business solvent and learn your lessons on paper, not the hard way.

A future newsletter will discuss the second and third basic financial control techniques: (2) Target Statements and (3) Accounts Receivable Aging Schedules.
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Forrest L. Farmer
Publisher and Consultant
CPI Business Development Corp.
Division of Clean-Pro Industries, Inc.

For comments on this article or suggestions for future newsletter topics, e-mail us at: newsletter@cpibusiness.com

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