I am just completing the teaching of two summer courses in Financial Management at Concordia University. It's time for their final exams so I'm now thinking about what are the most important lessons to learn for future business managers and entrepreneurs. Or alternatively, what do most entrepreneurs neglect in the management of their businesses?
Most of us focus regularly on the income statement - revenues, gross margins, expenses and the resulting profits. But we often neglect the management of our balance sheet - inventory, receivables, return on assets, and the short and long-term sources of funds. These issues can all have significant impact on profitability and the long-term value of the enterprise.
So I will try to emphasize the importance of regularly reviewing performance of assets and liabilities in addition to the more obvious and intuitive issues of sales and income. How does balance sheet performance compare to prior years? the plan? or the industry averages?
Can we improve turnover on inventory and receivables without losing sales or diminishing service levels. Can we extend payables and get additional short-term financing without hurting our credit ratings or adding to our costs? Are we making good use of long-term debt to add financial leverage and improve the return on our equity investment?
All important issues for effective financial management.