Small businesses have numbers and expectations flying in every direction. It can be complicated to keep everything straight, and once you do get it straight, there’s a good chance you’ll be unsure if the numbers you have are the numbers you need.
To be successful, you need to be confident in your business financials. They show you things like where your money is coming from, how much money is coming in and how much is going out, what you expect to spend, and what you expect to make; this list goes on.
In order to be confident in your business financials, you must:
- Focus on cash flow
- Use your budget
- Create a forecast
- Use the right metrics
Once you’ve nailed these areas, you can be sure you are getting the most out of your financials. Here’s how:
Focus on Cash Flow
Cash flow plays a major role when it comes to analyzing your business financials. Because it’s an overview of the money coming in (revenue, accounts receivable, etc.) and out (expenses) of your business, your cash flow will show you flaws in your budget, areas where you might be overspending, and let you know when it is time to grow. These indicators allow you to make adjustments to your business to help you improve its overall success.
To maximize your cash flow, you should pay close attention to your accounts receivable. A high accounts receivable will negatively affect your cash flow, whereas a lower accounts receivable means you’re more likely to have a positive cash flow. You can keep your accounts receivable low by:
- Collecting payments on time
- Tracking exactly how much you are owed
- Keeping tabs on what/who is past due
Another great way to keep your cash flow in check is by using budget variance. This compares what you expected to spend and what you actually spent. With the help of budget variance, you can see where money is being used against your budget and make the adjustments that will keep you on budget and enjoying a positive cash flow.
How good cash flow gives you confidence: Good cash flow means you are doing something right. A positive in the analytic shows you’re bringing in more money than you are spending, and as a small business, this is ultimately the goal.
Use your Budget
You spend a lot of time creating a budget, so use it. As mentioned previously, a budget shows you how much you should be spending in certain areas. Lean on your budget to ensure you are sticking with the spending goals you set for yourself. If you are analyzing your budget and find there are areas in which you overspent or underspent, you can use that info to make adjustments to future budgets. Either way, your budget is becoming more and more accurate or you are learning what areas require more or less cost.
How a well-designed budget gives you confidence: A well-designed budget tells you where and how to adjust your spending to ensure you are on track with your spending. The more accurate your budget, the more successful your business.
Create a Forecast
A basic forecast is a combination of well-thought-out assumptions about everything from potential growth channels, competitors actions, future sales, and expenses. Unlike a budget, which focuses more on spending, a forecast will give you a glimpse into what you can expect your business to produce/bring in. These projections keep you on track.
Not only are they good for internal measures, but forecasts also help predict external factors through market trends and patterns of your competitors. While it is likely your forecast won’t be able to predict a massive market crash, it can give you insight on when the market might dip and how it will affect your business.
How forecasting gives you confidence: Forecasting allows you to put together a set of educated expectations for your business. These realistic projections keep you future-oriented and show you that the steps you are taking are getting you closer to the expectations you’ve set for your business.
Track the Right Metrics
Tracking metrics is imperative for small businesses. When used correctly, they give you details covering every aspect of your business from revenue and expense, profit margin ratio, sales data, cash flow, and even your break-even point.
While there is an abundance of metrics, you do not need to track and analyze each of them to be successful.
- Revenue and Expenses: Revenue is how much money you have coming in, expenses are how much money you have going out.
- Net Income: Net income is what you have left after subtracting your expenses from your revenue.
- Cash Flow/Operating Cash Flow: Cash flow/operating cash flow is the amount of money you have coming in and out of your business.
- Working Capital: Working capital subtracts your liabilities from your assets and shows you what money you have to pay for more immediate expenses.
- Budget vs. Actual: Budget vs. actual is what was referred to earlier as budget variance. It shows what you planned to spend and what you actually spent.
- Accounts Receivable Aging: Accounts receivable aging refers to the amount of time it takes for your customers to fully pay back what they owe you. The shorter the time, the better your cash flow (as mentioned above).
- Accounts Payable Aging: Accounts Payable Aging is the opposite of accounts receivable aging. It gives you an idea of how long it takes your business to make good on your payments. Keeping this stat low will improve your credit.
- Break-even Point: Break-even point is essentially what it sounds like. It is when the money coming in is equal to the money going out. You are not making or losing money. This is useful when determining how much and for what price you need to sell a product to make a profit.
- Gross Profit Margin Ratio and Profit Margin Ratio: Gross Profit Margin Ratio is the revenue minus the cost of goods sold. The profit margin ratio is the revenue minus the total expenses. These are written as percentages to easily show your revenue per dollar spent.
- Quick Ratio: Quick ratio is helpful in determining if your business has sufficient assets to cover the cost of your liabilities.
- Average Customer Acquisition Cost: Average customer acquisition cost is the price for you to add a new customer to your business. It takes into account the cost of sale and the cost of marketing and divides that by the number of customers acquired. This is good in helping you determine if your marketing efforts are successful.
- Churn Rate: Churn rate will show you how often your customers stop relying on your business. The lower the churn rate the better.
- Cash Runway/Burn Rate: Cash runway/burn rate will tell you how long your business can survive based on the money you currently have. It will show you if you need to cut back or find more money.
How proper tracking gives you confidence: Tracking the right metrics gives you all of the statistics your business needs to remain successful. It saves you time sifting through unnecessary numbers and shows you exactly where you need to improve to continue to grow.
Work with an Experienced Accounting Partner
Focusing on cash flow, using your budget, creating a forecast, and tracking the right metrics will give you all of the confidence you need in your business financials. They will show you where/how you can improve, set expectations, and provide essential details about your business.
It’s important to be strong in each of these categories but you may not have the time needed to make that happen. If that’s the case, you should consider hiring an experienced accounting partner. They’ll be able to work on improving all of the areas above so that you can have confidence in your business financials.
How working with an experienced accounting partner will give you confidence: An experienced accounting partner will be able to work on improving all of the areas above so you don’t have to. With their help, you can have confidence your business financials are done correctly and giving you the most value.
If you are looking for an experienced accounting partner, turn to Adian Professional Accounting CPA.