Peter Drucker, the father of modern management, stated that every company requires four tools for success: fundamental information, information on productivity, information for the management of resources, and information on essential skills.
The information on productivity refers to the indicators that measure the productive performance of the organisation. Experienced accountants in central London explain that some of the financial instruments SMEs must take into account to be competitive in a globalised market are:
The equilibrium point analysis studies the relationship between costs and fixed costs, costs and variable expenses, sales volume and operational profits.
The balance point is understood as the level of production and sales that a company or business achieves to cover costs and expenses with their income.
In other words, at this level of production and sales, the operating profit is zero, that is, the revenues are equal to the sum of the operational costs and expenses.
The break-even point is also considered as a useful tool to determine the operational leverage that a company can have at a given moment.
Degree of operating leverage
Operational leverage is defined as the use of fixed costs within the overall cost structure of a company. In other words, when investing in fixed assets, it will generate a charge for depreciation, high or low; everything depends on the amount of the investment.
The displacement suffered by some variable costs, such as direct labour, fixed costs, and depreciation, causes companies to be operationally leveraged in order to maximise operational profits.
The displacement of human force by mechanical force means the total unit cost is minimised, which leads to the company restructuring its pricing policy, becoming more competitive in the market.
Degree of financial leverage
The financial capacity could be said to be the first of the five capacities that all SMEs have, the other four are investment, production, commercialisation and generation of profits.
Companies are financially leveraged and use the fixed expenses for interest in order to achieve a maximum increase in earnings per share when there is an increase in operating profits. In other words, the proper use of financing capacity, originated in the use of debt applied to productive assets, should result in an increase in operating profits and, consequently, an increase in earnings per share.
State of sources and uses
This is a financial statement that allows a company to identify if it is fulfilling the objective of properly orienting resources. Through a vertical analysis of sources and uses, the company will recognise the way it has been financed and its procedure when applying these resources.
Sources of financing are considered to be the internal generation of resources, increase of liabilities, increases in items that make up the stockholders’ equity and the decrease in assets.
It is used or applied to the increase of the assets, the decrease of liabilities and stockholders’ equity and the losses of the year.