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Succession Planning - drive growth with a financial dashboard
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 By Robert M. Nemeth, CPA/ABV, CVA, CDFA, CFE
Principal, Succession Planning Team Leader
Last month we learned how a SWOT analysis and follow-up strategic plan can enhance your succession plan by improving the future viability of the business.
After implementing a SWOT analysis and strategic plan as recommended by their succession planner, Jim and Steve, owners of JS Widget Company began to wonder if there were other techniques that they could incorporate into their business to help the Company grow.
Jim and Steve met with their succession planner who discussed how basic financial analysis could give them additional insight into the Company’s operations. Both Jim and Steve were somewhat familiar with this concept. Their bank required a specific debt to equity ratio as a condition of maintaining their annual line of credit. As the economy worsened over the last two years, the Company’s equity eroded somewhat and this loan covenant requirement was becoming more difficult to meet.
The succession planner explained that by using basic financial analysis techniques, management could identify positive and negative trends affecting the company. Timely information would allow management to act swiftly to correct any negative trends and focus on the important financial issues. By identifying a few key indicators, management can make quick informed decisions.
Jim and Steve engaged the Succession Planner to help identify the key indicators for their business. The Planner created a financial dashboard which highlighted the key indicators on one sheet of paper. The key indicators are compared to industry norms as well as the historical trends for the business. The printout looks like the familiar automobile dashboard and is much easier to read and quickly interpret than lengthy financial reports. Set up properly with your accounting system, the dashboard can be viewed on a daily basis.
During the process, the management team identified four key indicators:
Average Collection Period - the average number of days to collect accounts receivable
Debt to Equity – total liabilities divided by total equity
Gross Margin Percentage – gross margin divided by sales
Working Capital – current assets minus current liabilities
In the example below, the average collection period for JS Widget Company is better than 55% of its industry peers, while its gross margin is currently weaker than 70% of its industry peers.
Now that the key indicators have been identified, Jim and Steve can make informed decisions to allow JS Widget Company to thrive – a goal of any good succession plan.
By focusing on the key indicators for your business, the future value of the business and the ultimate success of your succession plan can be enhanced. For more information on financial dashboards and how Apple Growth Partners can help, email me at rnemeth@applegrowth.com.
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