In addition to having appropriate products and services, a company’s taxation and financial issues must be in order to ensure successful and sustained operations. Financial diagnostics helps with this.
Large companies generally have the necessary staff. It is not unusual for the finance manager to be supported by separate financial and accounting staff, and for additional controlling staff or a team to help define the appropriate cost structure and keep costs within limits. In this way, thorough knowledge of cost structures supports these companies with pricing. It is also natural that other functions required for acquisition, manufacturing, sales and operations have independent responsibilities too, with a specialised manager and staff and a control mechanism adjusted to the professional area.
Challenges for SMEs
By contrast, the majority of the above functions often either overlap or, in unfortunate situations, are completely missing in small and medium-sized companies in Hungary. The managing director and the owner are often the same person, managing acquisitions, manufacturing and sales, and also bringing in business and actively participating in product development. Generally speaking this means there is no longer sufficient time and energy for finances. This is particularly true if the manager is not a financial professional but comes from an engineering, technical, chemist or sales background, and lacks the inclination to pay sufficient attention to the company’s financial issues.
Yet a company may flounder even with the best product or service, or can be doomed to fail if its finances are not in order. Do not forget that a business is primarily established to make a profit.
Additionally, Hungarian SMEs have to stand their ground in the same economic environment and generally have to comply with the same legal regulations as large companies. Indeed, in certain cases they have to make significant efforts to obtain appropriate funding.
By the time some managers recognise that their company can only be sufficiently successful if its finances are in order, years may have passed without paying substantial attention to this area. Even worse, a problem arises that compels the manager to think about why his company makes losses when their product is believed to be successful and of high quality.
If the situation can still be saved (even in such cases), the problematic areas, which can make the company profitable or put it on a faster growth path if they receive more attention, can be identified through quick and professional financial diagnostics. And by maintaining financial awareness, the risk that the company might face a difficult situation again due to its finances can be mitigated.
Conducting financial diagnostics
Although financial problems may differ by company, there are areas to which attention should definitely be paid during the conducting of financial diagnostics.
For example, it is important whether a given business line or product is profitable or not. If it is, what does this mean precisely? How much profit does it generate? Does it cover variable costs only, or is the profit also enough to cover the given proportion of fixed costs? If a product makes losses does its production really have to be terminated, or will this put the company in an even worse situation?
It is also worth reviewing who generates cash inflows and outflows and at what pace within the company. Is the company not too generous with customers in terms of payment conditions? Do its suppliers offer payment assistance options that are perhaps due based on the size of the order?
WTS Klient has been able to help many companies by performing financial due diligences. The diagnosis not only gives a clear picture, but also helps specify the path and tools necessary to ensure stress-free growth. How does this work in practice? Send us an email, we will make an appointment, and you’ll find out the most important issues within a quarter of an hour.