Having a financially fit company involves monitoring your most important financial numbers. Most business owners are busy putting out fires, working with customers, and dealing with various other urgencies of the business rather than pouring over financial statements. We certainly don’t want to turn the Business Owner into an accountant, but it is important to keep a close eye on the critical numbers that can help predict a looming problem on the horizon or even a future opportunity for your business. There are always opportunities to improve profitability, so every month, you should review your financials and key metrics to make smart business decisions moving forward.
To help ensure that your business stays ahead and profitable, take the time to stay on track of these key financial numbers.
Operating cash flow offers tremendous insight into the financial health of the business. This figure is computed by subtracting your operating expenses from the revenue your company generates during normal business activities. It adds back depreciation to your net income and adjusts for working capital needs like changes to receivables and inventory. It is critical to make sure to have the necessary cash flow to meet all monthly business expenses. A Statement of Cash Flow provides a different look at the Company’s financial situation than an Income Statement, and often does not get the attention it deserves. Cash flow needs to be managed in some shape or form on a daily, weekly and monthly basis, depending on the business. Equally important, cash flow forecasting should be used in most companies to anticipate future cash flow shortages so that corrective action can be taken in advance.
Accounts Receivable Management
In most businesses, Accounts Receivable is one of the Company’s major assets, and the effectiveness of the management of receivables has a major impact on a Company’s cash flow. Accounts Receivable aging should be reviewed on at least a weekly basis, and past due accounts should be addressed proactively. It is also important to monitor Accounts Receivable trends over time and watch for any deterioration in collection patterns. DSO (Days Sales Outstanding) is another important indicator to follow in assessing how well Accounts Receivable is being managed.
Profit and Loss
This “bottom line” figure is found on your P&L statement, which is a snapshot of your company’s profitability during a specific period of time, which is generally monthly, quarterly, every six months and annually. Knowing your company’s profit and loss over time allows you to project earnings and make realistic plans for the future, both short term and long term.
Keeping a close eye on sales is important, as a dip could be a warning sign. In the same respect, it’s important to pay attention when sales are up. Determining why business is good at the time your company is on an upward trajectory is easier than trying to figure it out later. It’s also important to keep track of sales metrics such as: total sales by sales period, sales by product or service, sales by lead source, new vs. returning customers, and profit per sale. Tracking these activities allows you to see what’s working and repeat it, or what’s not working and eliminate it.
A coherent pricing strategy is critical to building sales for the long-run. Your company’s ability to sell effectively is what drives sales and that means hiring the right sales people, adopting the right sales strategy and having superior products/services. Pricing your products too low can have a disastrous impact on your bottom line. Overpricing a product can be just as detrimental since the buyer is always going to be looking at your competitors’ pricing. A fundamental tenet of pricing is that you need to cover your costs and then factor in an acceptable profit. Know how much your product costs, understand how much you need to mark up the product and how many you need to sell to turn a profit.
Also known as your Gross Profit this figure reflects how much money remains after the direct costs of your product or service is subtracted from the selling price. If this figure is low and insufficient to cover your other operating costs, such as salaries, rent, marketing and utilities, then you’re likely not charging enough for your products and services, or your cost to produce or supply your product/service is out of line.
Inventory (where applicable)
Make it a habit to monitor your inventory numbers on a regular basis to ensure that the amount of inventory isn’t gradually increasing, as this could be a sign of sales trouble. By tracking inventory on a regular basis, you can spot problems early enough to avoid the negative effects of excess inventory, which include storage costs, reduced profits, a drain on cash and potential waste. Of course, you need to also ensure that inventory does not run out which could lead to loss of sales. The key is to measure and actively manage this key variable.
Good business health isn’t achieved by accident. It takes a commitment from the business owner and management to consistently review these critical numbers, establish key metrics, and develop best practices so you’ll see warning signs before any financial emergency strikes.
If you would like customized assistance with growing your business or need help with other aspects of the financial management of your business, I welcome you to contact me for a no-cost consultation at email@example.com or (972) 689-1981.