Explore what to know about conducting a mid-year financial review, including key metrics to assess.
Why this is the perfect time to perform a Mid-Year Financial Review
With long sunlight hours and beautiful weather, summertime offers great opportunities for us to get outdoors and spend time with our families. Taking a break of the busy schedules we slog through during our busier seasons is important. But so is self-reflecting on behalf our business. While some businesses have a bit of a slower time during summertime, contractors and construction businesses are going full throttle. Take the time during your mid-year, whichever month that may be depending upon your business cycles. The important thing is to establish when this is for your business and schedule in.
No matter what month this ends up being, doing a mid-year review gives you the benefit of both hindsight and forward planning. By doing a review in the middle of your business calendar, you still have the chance to make some important adjustments while there's still plenty of time left to influence the year's results. Let's dive into how you can effectively perform this review and the key metrics you should be keeping an eye on.
Preparation for Your Review
To start with, make sure all transactions are correctly recorded and categorized. Next gather all relevant financial documents like your balance sheet, income statements, and cash flow statements. We suggest setting clear objectives for the review, such as cost reduction or profitability improvement.
Income Statement Analysis
Take a close look at your income statement to see how your actual revenue stacks up against your projections. Spot any differences and dig into why they happened—maybe some projects are doing better than expected, while others might be lagging. This is also a great time to identify any unnecessary expenses that you could cut back on.
We find Xero is excellent at establishing specific segments to set and comparing them to any other time period you would like. For example, comparing the month of June to the previous 6 months, or to the last six year’s of June.
Balance Sheet Insights
Your balance sheet shows your financial position at a specific point in time. Take a look at your current ratio to see if your company can comfortably handle short-term obligations. It's also a good idea to check your debt-to-equity ratio to get a clear picture of your financial leverage.
Cash Flow Considerations
Keep an eye on your cash flow. Reviewing your cash flow statement gives you insights into the cash entering and leaving your business. Focus on operating cash flow to ensure you're generating enough cash to maintain operations. If you are noticing a higher than usual activity here, this is a great opportunity to review investments and financing activities to confirm they align with your financial goals.
Don't forget to review your accounts receivable and payable to ensure smooth cash flow management. You’ve done the work, paid your employees, paid your suppliers but are still waiting on your invoices to be paid. This can be a challenging area for Architects and Engineers in particular. Having a review ensures you are staying on top of these challenges before they have a 6-12-months to snowball.
Key Financial Health Indicators
Focus on indicators relevant to your sector:
- Gross Profit Margin: Indicates efficiency and profitability.
- Net Profit Margin: Shows profitability after all expenses.
- Utilization Rate: Provides a clear indicator of efficiency and directly impacts your bottom line.
- Overhead Rate: Essential for accurately pricing projects and creating competitive bids.
- Net Labour Multiplier: Useful in determining whether the current pricing of services is profitable.
- Return on Assets (ROA): Measures asset efficiency.
- Return on Equity (ROE): Gauges profitability and efficiency in using equity.
Budget vs Actual
Having an established Budget is highly beneficial. We recommend and work with our clients to hone their expectations for the year and set a budget which will help them meet their goals.
Assuming you have a budget set, take some time to compare your budgeted figures with your actual outcomes. Spot any major differences and tweak your budget or strategy as needed. It’s easy to get distracted by the “success” of individual projects and miss a broader pattern forming in your actuals.
Forecasting and Strategic Planning
This ties in a lot with the previous two sections. Keeping a finger on the pulse of our Financial Health is critical for maintaining our long-range forecast and strategic plans. Make sure you update your financial forecasts based on how things have gone so far this year. Adjust your expense projections to match your revised revenue forecasts. This will help guide strategic decisions, like whether to expand into new markets or make changes to ongoing projects.
Engagement with a Specialized CPA
Working with a CPA who specializes in your sector can provide deeper insights into your financial health, offer strategic advice for better outcomes, and assist with compliance and tax planning.
We offer our clients the opportunity to:
Get specialised guidance in creating a tailored forecast and plan to put into action
Guide them along the way to strategically monitor their numbers and how best to respond
Conduct routine client reviews to ensure they are staying on track for their goals
Work together to map out a strategy that addresses the challenges they experience.
Some of our key services our clients have found helpful include (but not limited to): Business Planning, Annual Forecasting, Cashflow Management/Reporting, Routine Coaching sessions, Financial Awareness and KPI Improvement Coaching and Virtual Planning for YOUR Success.
Our Key Takeaways
Taking the time for a mid-year financial review is key to making sure your business not only meets but hopefully exceeds your financial goals. By diving into your financial statements, evaluating important metrics, and comparing your performance to industry standards, you can set yourself up for a strong finish to the year. A proactive and honest approach to financial management is essential for long-term success. Conducting a mid-year review is the perfect opportunity to make these adjustments, giving you a strategic edge for the rest of the year.
If you are interested in learning more about how we help our clients in staying organized and on top of their financials, follow the link below to Reach Out!
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