How to Use Management Reporting to Drive Greater Profitability & Shareholder Value

Business profitability & increasing shareholder value are linked to the alignment of the owner’s vision with that of senior management.

When there is a shared understanding of the company’s goals and how to achieve them, profitability and shareholder value can be substantially improved.

This requires having a clear understanding of your company’s financial health, so that you can make informed decisions that increase profitability, drive long-term growth and shareholder value.

However, many business owners and senior leaders are more experienced in sales or operations rather than finance. This can result in a lack of a complete understanding of the full financial impact of their management decisions related to sales, operations, capital expenditures, and financing options.

To overcome this challenge, business owners and senior leaders need simplified reporting that provides insights into selecting critical improvement initiatives.

This is where financial management reports come in.

Focus Your Financial Management Reports on these Five Critical Trends

A good management report will focus on the five most critical financial trends of a business: cash flow, sales/gross profit/margin, liquidity, shareholder value, and borrowing capacity. Understanding the trends of all five significantly improves the financial awareness of a business’ leaders.

Let’s break down these financial terms for those who may not be familiar with them:

Cash flow

This refers to the amount of cash coming into and going out of the business. A positive cash flow means that more money is coming in than going out, while a negative cash flow means the opposite. It is important to monitor cash flow to ensure that the business has enough cash on hand to cover expenses, capital investments and to fuel growth ambitions.

Sales/gross profit/margin

Sales are the total amount of revenue generated by the business. Gross profit is the amount of revenue left over after deducting the cost of goods sold. Gross margin is the percentage of gross profit divided by total revenue. These metrics are important for measuring the effectiveness of sales and pricing strategies.

Liquidity

This refers to the ability of the business to meet short-term financial obligations, such as paying bills, salaries, and taxes. A business with high liquidity has enough cash on hand and cash availability to cover these cash outflows.

Shareholder value

This is the value of the business to its shareholders. It is traditionally measured by the market value of the business’s equity.

Borrowing capacity

This refers to the amount of money that a business can borrow from lenders. It is determined by the business’s creditworthiness, available credit and ability to repay the loan.

Make your reports visual. Present them in an easy-to-understand format.

“Simplicity is the ultimate sophistication.” da Vinci

When you present the information in a way that is easy to understand and visually oriented, business owners and non-financial senior leaders can quickly identify key financial trends and make informed decisions to drive profitability and growth.

One way to do this is to create a dashboard that displays the five critical financial trends in a simple, easy-to-understand format.

For example, a dashboard might include a line graph that shows the trend in cash flow over time. The graph could highlight positive and negative variances to the agreed profit plan or budget, making it easy for the business owner to see whether their cash flow is on track or needs attention.

Another example might be a chart that displays the trend in sales, gross profit, and gross margin over time. This chart could use color-coding to highlight positive and negative variances to the agreed profit plan or budget, making it easy for the business owner to see whether their sales strategy is working and whether they need to adjust pricing or reduce costs.

In addition to these visual aids, provide clear explanations of the financial trends and what they mean for the business. For example, if the dashboard shows a negative variance in cash flow, the report should explain why this is happening and what steps the business can take to improve its cash flow.

Why financial management reporting matters: an example

One of the most common issues we see is when a business owner decides to use cash or revolving lines of credit to finance non-working capital investments, such as capital equipment or distributions to owners.

While this may seem like a good idea in the short-term, it can have negative consequences for the long-term financial health of the business.

When a business uses cash or credit to finance non-working capital investments, it can drain the resources needed to sustain and grow sales volume.

This can lead to a cash shortage for the order-to-cash cycle, which is the time it takes for a business to receive payment from its customers after a sale is made.

If a business does not have enough cash on hand to cover its expenses during this cycle, it can result in missed opportunities or even bankruptcy.

This is where financial management reports can help.

By tracking and analyzing the five critical financial trends mentioned earlier, business owners can make informed decisions about how to allocate their resources.

For example, if a business owner sees that their cash flow is decreasing and their borrowing capacity is reaching its limit, they may decide to hold off on making non-working capital investments until their cash flow improves or utilize other financing alternatives.

In this way, financial management reports can help business owners avoid making decisions that may have negative consequences for their business.

When you have a clear understanding of your financial health, you can make informed decisions that drive profitability, long-term growth and shareholder value.

Financial management reports are a crucial tool for family business owners to increase profitability, drive long-term growth and increase their shareholder value.

By having a clear understanding of the company’s financial health and the impact of management decisions, business owners can make informed decisions that lead to success.

However, while the data needed for these reports is readily available from most financial reporting systems, interpreting the data can be overwhelming for those who are not financial experts. That’s why it’s important to seek the help of an experienced family business advisor and financial accounting expert.

With their guidance, you can create effective financial management reports, identify critical improvement initiatives, and drive profitability and growth for your business.

Don’t wait until there is a cash shortage crisis – book a call with an advisor today and take the first step towards achieving your financial goals!