What is financial performance, and how to improve it?

The financial performance of any enterprise shows the level of success that a business is achieving. Every business owner strives to turn it profitable, yet this wish is always hard to achieve because of the competition and dynamic marketing forces. Enterprise profitability is a result of achievements including, leadership, positive cash flows, efficiency, planning, competitive advantages, understanding the market and customers, unique offers and more.  In this article, I will discuss some actionable tips to improve the financial performance of your enterprise.

1. Set financial objectives:

You start by setting the financial targets for your enterprise including, revenues and growth, costs, net profit, return on capital and investment, cash flows and capital structure. Setting financial objectives helps you to measure and assess the financial performance of your business.

2. Evaluate influences:

Any enterprise is influenced by some internal and external factors. Internal influences include the corporate objectives, available resources, sales and operational factors, and the external influences include the competition and other market forces, economic, political, legislation, technology and social factors. The value of assessing enterprise forces includes anticipating any future risks and capitalizing on opportunities to improve enterprise performance.

3. Construct an annual budget:

It is the process of planning cash-ins, cash-outs, allocating funds and setting control measurements. Enterprise cash-ins can be generated from revenues, decreasing of net working capital, selling fixed assets and investments, gaining investment profits, getting loans and increasing equity. And the cash-outs resulted from the operating expenses, purchasing, investing in working capital and fixed assets, repaying loans and dividends. Any anticipated deficit that results from the difference between the cash-ins and outs, is financed through loans or equity or internal sources. Setting up a business budget is challengeable, and it becomes more worsen if the enterprise has no previous records or facing forecasting challenges or funding difficulties.

4. Control budget:

This shows the enterprise way to check actual versus budget spending, and variances can be positive if spending is lower than planned, and negative when the opposite scenario occurs. Controlling actions aim to eliminate any negative variances and aligning expenditures with the budget. Tactics for controlling any negative variances include reducing expenses, negotiating purchasing prices, postponing investments, delaying payable payments, reducing credit provided to customers or pushing sales up.

5. Forecast cash flow:

This is the process of planning cashflows from the operation, investment, financing and equity. Cashflows from operation result from the income statement and the working capital and cash flows from the financing come from loans. And cashflow from equity results from issuing equity shares or distributing dividends. Importantly, you need to plan your enterprise cash-ins and cashouts and identify any deficit ahead of time for funding.

6. Estimate the breakeven point:

It is the process of constructing a breakeven chart and estimating the breakeven point, which can be calculated by dividing the annual estimate of the fixed costs on the product’s gross profit. It is easy to estimate the breakeven point theoretically, but it is very problematic. This is because of the challenges to estimating revenues, fixed and variable costs. Influences of the breakeven point include the selling prices, quantity sold and fixed and variable costs. The value of the break-even point is to estimate the profitable sales and identify any business risks. The key withdraw of the breakeven model is that it is a static approach, and it will be difficult to operate in dynamic business conditions.

7. Analyze profitability:

It is the process of studying the enterprise profitability, and it includes analyzing the gross profit, operating profit and net profit. Profitability is a function of revenues minus all expenses, and it is improved if revenues increasingly exceed expenses.

8. Make financial decisions:

Any enterprise needs to make some important financial decisions including, estimating funds, identifying sources of fund and improving cashflows. In estimating funds, you will estimate the funds required to finance capital and operating expenditures, and identifying sources of finance includes internal sources, e.g. cash flows from operating, investments, finance and equity, and the external options are loans or increasing equity or grants. Improving cash flow and profitability include improving sales, increasing efficiency and productivity and controlling expenditures.

Final note:

This article is extracted from my new book- Mastering Enterprise Skills for Potential Entrepreneurs, which can be found on www.amazon.co.uk. If you want to receive more information about the book and our activities, you can register in our newsletter by using this link.

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Prepared by Munther Al Dawood

Enterprise Expert

Grow Enterprise



Reading, UK

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