If you’re launching a small business, you’ve probably got some basic financials in mind; how much to charge, how much you want to take home each year, etc. But you probably haven’t set up any financial modeling or reporting.
Unfortunately, the first few months and years are actually the time you need to be tracking this information most of all. It’s the period in your businesses life where most decisions which shape the business for years to come are made, and without good financial data inputs those decisions are often left made on the basis of anecdotal evidence, or worse, gut instinct.
To avoid that situation, here are five basic business figures that you should be tracking in your business from day one. And if your business is already underway, don’t worry, just start now….
1. Cashflow Runway: It’s okay to be hopeful, but don’t be an idealist. You’re not going to make a profit on your first day…maybe not in your first year. So to survive you need to know at all times how many months of cash flow or “runway” your business has before you go broke. You also need to know the industry average for time to reach consistent profitability for your niche. Once you learn the industry average, add 20 percent to be on the safe side. Then look at your cashflow runway. If you have enough runway you’re okay, if not, go find more funding because you’re already going broke at your current level of funding, no matter how much money is in your bank account.
2. Accounts Receivable % Overdue: You can look back on your business plan and feel satisfied that you realized a profit on paper…if in fact your books show that your sales far exceed your overhead. But, if you’re not collecting that money from those sales, that profit will never be realized. Take a look at the percentage of sales paid on time against the sales that are late. Look again at your industry average…are you on par? If not, then assign someone (it may be you) to track down those accounts receivable and make sure they pay any penalties you’ve assigned for late payments. If you don’t track accounts receivable, you will run into cash-flow problems.
3. Monthly Cash-flow Forecast: Most businesses don't actually fail, they go broke. A failing business is one where its sales revenue aren't sufficient to cover its costs. By contrast a broke business is one that cannot meet the cash-flow demands of a particular phase of that business. That’s the far more common problem, and it’s totally avoidable if you’re monitoring your monthly cash-flow forecast. For example, you need to have modeled out that if you're in retail you need cash to restock your inventory, or that you’ll need a lump sum payment to pay the tax man each year. Model out your cash-flow month by month because finding out that month that you cannot make payroll is a lot worse than 9 months out, when there's still something you can do about it.
4. Cost of Goods Sold: Yes, it’s exciting to make that first sale, and the second sale, and even a bulk sale…but don’t forget that those sales must be profitable to equate to business success. If you aren't tracking your cost of goods sold accurately and if you don’t check those costs on a regular basis, you may not realize that you’re actually losing money on some sales. That underpriced sale may mean a short-term cash injection, but it’s a long-term path to bankruptcy.
5. Sales Revenue Allocation: You’ve heard the cliché before – don’t put all your eggs in one basket. In other words, a business with 100 small clients is far more secure than a business with one large client. Diversify your revenue stream from day one and continue to compare that diversity against your industry average. The more diverse your revenue sources the better. This diverse income resource is less susceptible to shock when that one customer leaves, which will eventually happen no matter how good the service you offer.
The early phases of a business are some of the busiest times. You’re still trying to develop a product and a business model, and so things like financial tracking can tend to get put on the back burner. Unfortunately, the instinct to put basic financial modeling on hold is one of the worst decisions you can make. Instead, make sure to put regular tracking into place so that avoidable business killers like lack of revenue diversity, uncollected accounts receivable, and improperly priced goods don’t happen to you.