Ready to start managing your business finances better?
Still confused what numbers to even start watching?
Here are three small business financial metrics that are critical to your success.
Cash Flow
Cash flow is about how much cash you actually have to run your business. Remember cash is king!
If you are making sales, but not collecting the money you may show a profit but be broke because you have no cash. Likewise you may have a business that shows profit because of depreciation or other accounting measures, but is not profitable.
By having a cash flow statement you can see when your bank account will hit zero. This is the magic report that will help you know if you can make payroll or launch that new product that you want to.
It does not even have to be fancy. Use an excel sheet to track your checking balance and upcoming expenses and income.
P&L – Otherwise Known as Profit and Loss Statement
The P&L, or profit and loss statement, will show you if you are making money or losing money.
In a P&L you will see revenues, expenses and then your profit. This report will help you determine if your lack of profit is due to sales, expenses or even both.
By paying attention to this with a business budget you can better manage your spending and promotions to get to profitability.
Don’t forget to follow trends in this over time. Compare this year to last. Even this month to the same month last year. This is a great way to find problems before they become too big.
Industry and Business Specific Financial Drivers
Every single business and industry has different numbers that lead to profitability. For example a restaurant, a freelance writer and a programing company are all going to have different things that drive the business profitability.
You need to figure out what these are for you and your industry.
You can look at industry publications, you could ask other business owners in your industry or even just sit down and look at your own data.
Can you determine what causes your sales to go up or down?
Can you figure out what drives your margin to a point that you cannot make enough profit on each sale.
If after doing some research you still cannot figure out what numbers you should be tracking, talk to your CPA or hire a business coach that specializes in helping drive profits by watching the numbers!
Action Step
Start following the first two ASAP. It is critical that you are paying attention to your cash, income and expenses. Once you are tracking these, then start to figure out what business specific numbers are driving your profit. Then follow those!
Set aside time each and every week to look at your financials. Get into a regular habit of taking care of your finances. Your bank account will thank you!
