Important Small Business Financial Metrics You Need to Know
Important Small Business Financial Metrics You Need to Know
To run a successful small business, you don't have to be an accountant, but there are a few key financial parameters that every business owner should know like the back of their hand. Building a strong and successful business depends on your ability to interpret the information these numbers are giving you.
Make sure you are in control of your finances.
- Are all of your business expenses within your control?
- Yourcash flow metric: do you know it?
- Are your outstanding debts current?
- Do you keep track of your payables?
Of course these aren't the only metrics you need to pay attention to, but I consider them the top five. Read on to discover more.
I don't believe I'm alone when I say that, unlike many small business owners, I didn't start my company because I was very enthusiastic about accounting or bookkeeping for small businesses. Although I was aware that it was a requirement, I wasn't overly excited about this aspect of business ownership. However, there are crucial small business financial measures that every business owner should be aware of.
I assumed I knew more about the crucial small business financial indicators than I actually did, despite the fact that one of my closest friends is a CPA and was frequently giving me accounting advise (some of which I actually listened to). Looking back, I realize that my life would have likely been simpler if I had known what I didn't know at the time.
Understanding your company's financial indicators and what they are saying you will help you manage a successful business, determine whether or not it is profitable, and avoid discovering one day that you are slowly approaching insolvency and closing shop. There are a few metrics that I believe every business owner ought to be aware of, but I must first make the following disclaimer:
"I'm not an accountant, so while I think from personal experience that these are some of the metrics that every business owner should be aware of, you should also speak with your accountant or a trusted financial advisor to see if there are any other metrics that they feel are more important for your business and to get their perspective on what these metrics mean and how you should measure them."
I once spoke with a lender who stated, "If I can tell more about a firm by looking at the financial data than the business owner, I'm not inclined to provide them a loan." In addition to being tools to assist you successfully run your business. In that regard, being fully aware of what your financial reports are informing you of also inspires confidence in others who work for you, extend loans to you, or otherwise support your success.
5 Key Financial Metrics for Small Businesses You Should Know
The majority of these measures are rather simple and rational, but I hope I can add something from my experience as a small business owner and provide some insight into how I tracked these metrics in my enterprise.
1. Income: Nothing else occurs in a business without revenue. No one is paid. No products are delivered. There is no way to buy supplies. Businesses are unable to function sustainably without revenue. This is one of the first metrics you should get to know, in my opinion. I kept track of this number every day, every week, every month, every quarter, and every year so I could compare how I was doing with how my company was performing the previous year, month, week, etc.
For instance, a lender may consider this figure to be significant. Without revenue, your company's ability to service debt will be viewed as suspect because one of the things they are trying to determine when they analyze your loan application is whether or not you have the income to make any periodic payments associated with a potential small business loan. Fortunately, it's not too difficult to record this figure. How much did you sell overall?
2. Expenses: There are numerous ways to categorize your expenditures, and your accountant may assist you with that. However, in the end, you want to know how much it really costs to run a business and whether or not your revenue is enough to cover those costs. The gap between your income and expenses is what determines whether or not your business is profitable. Profits should, after all, be one of your main objectives when starting your own firm.
It's true that some companies today (especially in the IT sector) prioritize expansion over profits in the beginning. In order to accomplish this, they rely on investor income rather than earnings to support growth before they turn a profit. That is how businesses like Facebook, Twitter, and Uber sprang to prominence.. These investors predicted that by making an investment today in anticipation of a potential payoff in the future, their returns would be exponentially bigger. You may be thinking about this if your small business has the ability to expand and scale profits with the addition of capital, but for the majority of small business owners, the key to making a profit is to sell their products or services for more than it costs to manufacture them.
3. CashFlow: Over the years, poor cash flow has sounded the death knell for countless small enterprises. This is what the phrase "Cash flow is king" means, if you've ever heard it. You need to understand your Cash Flow Metric; it is not sufficient to simply have money in your business checking account at the end of the month.
This measure is calculated by dividing your assets by your liabilities. This statistic is so crucial that, if you're not sure how to define assets and liabilities, I urge you to see your accountant so you're certain of the terms. Two times as many assets as liabilities is the best ratio for this statistic. Naturally, many firms find it difficult to sustain this 2:1 goal, but anything below 1:1 should raise serious concerns about the viability of your company's cash flow.
This measure may be significant. For instance, it ought to be taken into account carefully while evaluating potential small business loans. If loan payments cause your metric to fall below 1:1, it may be a sign that you are borrowing yourself into problems since they become a liability. The success of your small business depends on your ability to manage your cash flow statistic.
4. Aging of accounts receivable is a crucial measure that you cannot afford to ignore. How long does it often take for your clients to pay their invoices when you extend credit terms? Do customers always pay within 30 days if you provide 30-day periods, or do they occasionally stretch 45 or 60 days?
Due to the effect it had on my cash flow, in my firm, after 45 days I started to lose any profit included in an invoice, and after 65 days all of my profits had vanished. Additionally, it become harder to collect for each day an invoice was overdue by 40 days. (These timeframes might not apply to your specific firm, but it's worth looking into your circumstances to find out what they are for your company.)
Without a doubt, I made a lot of effort to keep my clients current, and I even enticed them to pay early by giving them a discount on their invoice if they did so within 10 days. By providing me 20 longer days to spend that money to increase earnings, those who took advantage of the discount benefitted my firm; in other words, the discount was worthwhile to me.
5. Accounts Payable Aging: The typical number of days it takes you to fulfill your company's financial commitments is another figure you should be aware of. You should be able to maintain your accounts payable current and perhaps even benefit from the rapid payment terms your suppliers probably provide you if you can manage your accounts receivable, cash flow, and income properly.
I am aware of some small business owners who make sufficient savings by paying their suppliers in advance and accepting the provided discount that they are able to deduct a sizable amount from payroll each month. Additionally, if you examine your revenue and outgoing costs, your ability to accept that reduction might even have a favorable effect on your profitability.
Staying current on your business credit obligations is the single most crucial thing you can do as a company seeking borrowed cash to improve your business credit rating and expand the options you'll have when it comes time to borrow. Included in this are your utility payments, business lease, vendor credit relationships, and any other credit obligations you may have for your firm.
I think it's critical to understand these five indicators in order to manage a successful organization. You might even wish to explore one or two of them more thoroughly. For instance, you may group certain types of spending into specific classes to make them simpler to comprehend and manage. You can get assistance from your accountant or CPA in choosing the metrics that would provide you the most information about your company.
If there are any phrases or formulae you don't understand, don't be hesitant to approach him or her for clarification. Your accountant ought to be able to explain them to you clearly. One of the biggest mistakes I ever made was treating my connection with my accountant as a transactional one rather than one that may have helped me more readily expand my firm. I wish, in retrospect, that I had benefited more from that relationship.
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