Five Figures Every Business Owner Should Check Every Month

Many business owners only realise that their company is in difficulty when the annual financial statements are prepared, that is, when the decisions that could have corrected the situation already belong to the past. Difficulties, however, rarely arise suddenly, as they usually announce themselves through signals that appear well in advance in the company's figures and that regular monitoring makes it possible to pick up in time. This is precisely one of the functions of management control, which in its simplest form consists of reading and analysing certain company data every month and comparing them with what had been forecast, in order to understand whether the business is generating a profit and whether that profit is turning into money that is actually available.

In practice, people often rely on just two reference points, turnover and the current account balance, which on their own may, however, give a distorted picture: the former shows how much has been sold but not how much has been earned, while the latter shows the money available today but not the money that will be needed in the following weeks. To obtain a reliable picture, it is therefore advisable to monitor five figures every month, which describe both the company's ability to earn and its ability to pay: turnover, margins, receivables to be collected, payables falling due and available liquidity.

The first is turnover, that is, the value, net of VAT, of the sales and services invoiced in the month, which should be compared with the same month of the previous year, to take seasonality into account, and with forecasts. A sudden drop or a strong concentration of sales on a few customers are useful signals, but turnover only measures the volume of activity and does not show how much the company actually earns.

For this reason, the second indicator is the margin, which in the form most useful for this type of monitoring corresponds to what remains of revenue after deducting variable costs, that is, those that rise or fall together with sales, such as raw materials, goods for resale, work subcontracted to third parties or agents' commissions, taking into account the cost of what was actually sold in the month rather than purchases, which may have remained in stock. If a product sells for 100 euros and involves variable costs of 60 euros, the margin is 40 euros, and with this amount the company must cover the costs it incurs regardless, such as rent, administrative salaries or insurance. Knowing the margin therefore makes it possible to calculate the break-even point, i.e. the level of sales below which the business operates at a loss: with monthly fixed costs of 10,000 euros and a margin of 40 euros per product, at least 250 units must be sold each month merely to cover them. Monitoring its trend also makes it possible to detect a common pitfall, that of turnover growing while the margin shrinks in relation to sales, for example because prices have not been adjusted to costs, with the result that less is earned on every euro sold and, in the worst cases, less in absolute terms.

The margin, however, remains a profit on paper until customers pay, and this is where the third indicator comes into play: receivables to be collected, that is, invoices issued and not yet settled. Here it is worth looking at the amount of invoices already overdue and the average number of days customers take to pay, which is estimated by dividing trade receivables outstanding at the end of the month by the turnover of the last twelve months, both net of VAT, and multiplying by 365. With annual turnover of 1,200,000 euros and receivables of 300,000 euros, customers pay on average after about three months, and an increase in this value over time generally signals that sales are being converted into cash ever more slowly, forcing the company to advance the amounts out of its own resources or through bank credit.

Likewise, it is important to know how much the company has to pay and when, and this is the fourth indicator, consisting of payables falling due to suppliers, banks, employees, the tax authorities and social security institutions, which are monitored by means of a payment schedule, i.e. a list by date of the payments expected in the following weeks, useful for checking whether expected collections will be sufficient to cover them. Particular attention should be paid to VAT, which the company as a rule collects from customers together with the price but which is not its own money since, net of the VAT paid on purchases, it must be paid over to the Treasury at the periodic deadlines. Monitoring payables is also useful because certain delays are identified by law among the signals that help foresee the emergence of a crisis: the Italian Business Crisis and Insolvency Code mentions, among others, salaries overdue by at least thirty days for more than half of the total monthly payroll and payables to suppliers overdue by at least ninety days exceeding the amount of payables not yet due.

All these elements come together in the fifth indicator, available liquidity, which measures the company's ability to meet its commitments and which does not coincide with today's current account balance, since this may already be largely earmarked for salaries, loan instalments, taxes, social security contributions or suppliers falling due, and since withdrawals by the business owner, directors' fees or the distribution of profits to shareholders also reduce the resources available, while unused bank credit lines represent a reserve to be taken into account. For this reason, it is useful to supplement the accounting data with a cash budget, that is, a forecast for the following months of what the company expects to collect and to pay, which makes it possible to identify periods of strain in advance. It also helps to understand why a company may close the financial year with a profit and still have difficulty paying: profit derives from comparing the revenue and costs pertaining to the period, whereas cash depends on when money comes in and goes out, as happens when goods are sold with payment at ninety days or when a machine is paid for immediately while its cost affects the result only gradually, over the years.

The value of these five figures emerges above all when they are read together: rising turnover accompanied by falling margins, slower collections, increasing overdue payables and declining cash is a typical sequence for companies heading into difficulty which, if identified in time, can be addressed with ordinary tools, such as chasing customers for payment, reviewing prices or renegotiating payment terms. This is the same logic followed by the legislator, which requires businesses to adopt arrangements suitable for the timely detection of a crisis and for verifying the sustainability of their debts for at least the following twelve months. Monthly monitoring of these indicators does not in itself fulfil those obligations, but it provides a concrete basis for doing so even for the smallest businesses, and the Firm is available to work with clients to build a reporting template tailored to their own business.