SMEs: why you should monitor your financial performance regularly

The past year has shown that no company is immune to risk, that risk can come from many dimensions, and that it’s coming much faster. Financial crises used to take time to develop; today financial crises come at us with breakneck speed. And who could have imagined that a ship stuck in the Suez Canal could halt world trade for a week?

Laying the groundwork for a prosperous future implies conducting rigorous financial monitoring today. Here we explain the KPIs you need to evaluate financial performance and why it’s important to do so.

Risks around payment delays and client insolvencies were already prevalent before the Covid-19 outbreak – affecting respectively 47% and 32% of businesses in Europe’s four largest economies over the previous year according to a financial survey we conducted back in March 2020.

Not surprisingly, company concerns have escalated since the crisis began, with more companies impacted by payment delays and the impact on cash flow causing them to shift priorities – sometimes to ensure survival. And that could lead to an insolvency domino effect which starts when an insolvent company is unable to meet its obligations to its trading partners, leaving them with unpaid invoices. That means payment delays for their suppliers, and so on down the supply chain. 

Survival under these circumstances depends on being able to react swiftly and pivot when necessary. The best way to do this is to be on top of your financial situation so you know what you can afford to do and what you should avoid doing.   

That’s the best case for paying close attention to your company’s financial performance on a regular basis: cash flow, debt levels and receivables. Monitor especially for signs of vulnerability.

“Think of it as a kind of machine maintenance,” says Nicolas Marchenoir, Head of Commercial Underwriting at Allianz Trade in France. “You want to tune up your financial reporting to catch problems before the machine breaks down.”

In the short term, you want to be sure you can pay your bills at the end of the month. In the longer term, you want to understand how your capital investments will fare over the next ten years.

• EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) shows you the company's overall business profitability.
• Net profit margin shows how much of each euro in revenue collected by the company translates into profit.
• Operating cash flow and the debt-to-EBITDA ratio show how solvent the company is in the short and medium term.
• Working Capital is the amount of liquid net assets available to fund the company’s day-to-day operations.
  
• Liquidity refers to how much money a company is able to generate after paying for operations (salaries, supplies, etc…) but also its capital investments.
  

Cash flow is something you should check on a daily basis because it will help you manage expenses. Our advice is to evaluate performance and adjust targets for the immediate future on a monthly basis, seasonal performance on a quarterly basis, and annually to understand what changed since you set the year’s goals, and why.

The worst thing you can do is use all these KPIs to gather information and then forget about them once you’ve made up the spreadsheet, as this won’t help you prevent cash flow problems.

It’s a good idea to include your team in this process so you have a real overview:

• Schedule regular reports: collect data and make it available on a digital dashboard or in the cloud.
• Analyse this data with your team to gauge past performance and make future predictions.

Take a wider view and look at unemployment statistics, macro-economic and sector trends, demographic changes, and even climate risks that may be at play (think of the increasing number of extreme weather events that might disrupt your supply chain).  

Consider bringing in expert guidance, such as a risk analyst or risk underwriter. Risk analysis and underwriting are becoming ever more important as businesses try to navigate an increasingly volatile market. Risk analysts don’t just crunch numbers in a computer spread sheet, they look at the whole ecosystem a company operates in and help you make sense of the numbers in order to make better-informed decisions.

At Allianz Trade, our risk underwriters act as trusted advisers during key decisions as part of your trade credit insurance policy, providing predictive protection and helping you grow your business safely.

For more tips and advice on business financial monitoring, download our ebook: Boost your financial performance analysis.