Businesses must carefully manage their finances to ensure that they are able to meet their financial obligations and achieve their desired financial goals.

One key metric to benchmark a business against is the financial end-of-year comparison. This will give an understanding of whether the business has improved or deteriorated and the key drivers behind this change.

Financial analysis is the process of examining a business's financial data to determine its strengths and weaknesses, understand the business's overall financial health and make recommendations about how the business can improve its financial performance.

Businesses use two main types of financial analysis: internal and external. Internal analysis focuses on a business's own financial information, while external analysis examines the financial statistics of other businesses in the same industry.

Businesses can use both internal and external benchmarking to ensure that they are managing their finances effectively and achieving their desired financial results.

Why internal benchmarking is important

While it may seem daunting, reviewing business financial data is a critical step in understanding the health of a business and identifying areas for improvement and ways to mitigate risk.

The financial end-of-year comparison process includes comparing the current year's financial reports with previous years' reports against the business strategic focus. This is an essential tool for all businesses. There is little point in benchmarking externally unless a business investigates the specifics of its own situation first.

If a business is bringing in less revenue than it did last year, steps need to be taken to improve the financial situation.

This may involve cutting input costs, increasing outputs, identifying alternative markets or finding new sources of revenue. On the other hand, if a business is doing better financially than it did last year, the extra money can be reinvested in the business or used to reward business owners and employees.

Businesses can use comparison information to identify trends and make decisions about where to allocate resources.

Financial end of year comparison is also used to assess risk and measure growth. By understanding how a business has performed in the past, businesses can make better decisions about the future.

Key areas of focus for comparisons

There are several key areas to focus on in making comparisons:

1. Revenue

How much revenue did the business bring in this year compared to last year? This is an important number to track, as it will give a fair indication of whether or not the business is growing.

2. Expenses

Take a close look at expenses and see where improvements can be made. Are there any areas where the business spending more than necessary? Identify areas of waste to save money in the future.

3. Profits

Compare profits from this year to last year. Hopefully, an increase will be seen! If not, don't panic — there may be other factors at play. However, if profits are down, it's important to try to identify why and see if there are any business changes that can be made to improve the situation.

4. Margins

Analyse margins in order to compare performance to previous years and set goals for the next financial year. By understanding margins, businesses can identify areas where they are making a profit and where they need to cut costs. Additionally, analysis of margins can aid businesses to negotiate better deals with suppliers and understand the pricing strategies.

Additionally, this is a time to review the financial impact of strategic approaches. Create a set of key main areas for review; this can be done in conjunction with your consultant if you have one.

Questions to ask during your comparison

Below are a series of focus questions to keep in mind when reviewing business financial data:
• What are your revenue and expense trends? Are you seeing growth or decline in either area?
• What are your major sources of revenue and expenses? Are there any areas where you can reduce costs or increase revenue?
• What is your cash flow situation? Do you have enough cash on hand to meet your short-term obligations?
• What is your debt situation? Do you have more debt than you can comfortably handle?
• What are your profitability trends? Are you seeing an increase or decrease in profits?
It is also important to establish your strategic focus questions, for example:
• How have your business strategies impacted your revenue, expenses and overall profit?
• Has your decision to change chemical/fertiliser inputs or method of application resulted in an increase or decrease in yield?
• Has your crop rotation approach improved outputs over time?
• Are market conditions favourable? What impact will this have on your income/expenses? How will this impact your business strategy?

In summary

By taking the time to review the financial data on a regular basis, businesses can stay on top of their business's finances and make informed decisions about where to allocate resources.

Benchmarking is a key process that all businesses should undergo on an annual basis. It allows business owners and operators to measure their performance against others in their industry, as well as track the progress of the business over time. This process allows businesses to not only stay across their finances but also adjust business strategy for a positive future.

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If your business is experiencing or at risk of financial difficulty, please do not hesitate to contact us. We have worked with many businesses through these difficult times and our team of Small Business and Rural Financial Counsellors are ready to assist.

Rural West is a free, mobile, confidential and independent strategic business financial counselling service supported by the State and Federal governments. Rural West works with a wide range of primary producers and regional small business owners to improve their position and profitability.

Contact Rural West on 1800 612 004 or email enquiries@ruralwest.com.au