Small business is incredibly diverse. Companies vary wildly in size and industry, but there is one subject that every company, no matter what its business, needs to learn - finance.
You don’t need to be able to do your own taxes or generate your own financial statements. It is too easy to hire an accountant to pull it all together and make sure you are in compliance than spending hours pouring over your books and the tax code, trying to get it right. But that doesn’t mean you should disregard “the numbers” all together.
Your financial statements contain a bevy of information that you can use to help you run your business better. The balance sheet shows your company’s financial strength while the income statement provides a look at how profitable your operations really are. The cash flow statement takes it a step further and provides insight into why you might have an incredible volume of profits on your income statement but barely anything in assets.
Together, the financial statements also contain different key measures of profitability. You can look at your company’s gross margin, net income, cash flow, and EBITDA to get an idea how much your company is making and what additional costs it can afford to take on. In essence, they can show how “healthy” your business is - but there is more to the picture.
You can use your understanding of your company’s financial statements and the measures of profitability contained therein to form a more complete picture of your company’s operations, its past successes, and its capability for the future.
While some of the most critical numbers for your business will vary greatly by your industry but there are a few numbers every company should track:
- SALES: The idea of tracking sales or revenue may seem obvious but it needs to be stated. like ignoring a bad relationship, if sales are falling, you as the business owner need to find out why. Likewise, if business is booming, you should take a look at WHY it is booming. If you aren’t tracking these numbers, and tracking them specific to the different products and services you offer you could miss a great opportunity or not see that the sky is falling before it is too late.
- SALES PER: In addition to tracking sales as a whole, you also need to track “sales per”. Spend some time looking at which sales associates or waitresses bring in the highest average volume per sale, which consultants are responsible for the most billable work, which days (and times of day) when sales are highest. You may be able to spot inefficiencies or opportunities you miss otherwise.
- NET PROFIT: Make sure you know just how much you are netting on each project, and how many such projects or products you need to sell to break even. You may find that over time costs have increased while sales remained steady or that you’ve lowered a price on something so low that you are actually losing money by the time you pay overhead.
- QUICK RATIO: The quick ratio is calculated by adding together your company’s cash and accounts receivable, then dividing by your accounts payable (aka “current liabilities”). This metric demonstrates whether you have enough to pay your bills
- DEBT TO EQUITY: In this day and age of easy credit, tracking your debt to equity ratio is crucial. It can helps the clarify your company’s financial position and your practical ownership. It can also serve as a starting point for creating a budget to pare down your debt.
- PERCENTAGE OF SALES: You should also track your costs relative to sales. Metrics like wages to sales or overhead to sales can help you make sure that costs aren’t spiraling out of control, or headed that way..
- INVENTORY: Track inventory with the same goal in mind - to see if levels are increasing without explanation. Spending a little time keeping an eye on this now will help forestall problems with excess inventory later.