You don’t need to be a math wizard to understand which numbers can tell you how well or how poorly your business is doing.
But you do need regular financial updates and the discipline to sit down and check the key performance indicators (KPIs) that matter most: sales, profit margins and cash flow.
It’s important to check your finances every month, because it will give you the chance to course-correct any strategies throughout the year. Waiting to review year-end figures may be too late because there’s little you can do to change historic numbers.
Get to know your financial statements
Fortunately, modern accounting software makes it easy to generate financial statements so you can perform some quick calculations to check the financial health of your business. So, assuming your input data is current, it shouldn’t take much effort to get the reports you need.
You will find the information you need within the Income Statement, Cash Flow Forecast and Balance Sheet. For best results, financial statements and other KPIs should be prepared regularly and compared with prior periods.
Watch these key figures:
Measuring the number of days it takes to sell inventory allows you to adjust your pricing or marketing. A low number means stock is being sold quickly.
Counting the average days from sale to accounts receivable collection will tell you if your company needs to improve its debtor policies—for example, you may need to reduce customer credit terms.
A low debt turnover ratio means accounts are being paid reasonably fast. It’s an important figure to monitor because the timing of receivables impacts your cash flow.
Checking to see if current assets cover current liabilities allows you to assess your company’s ability to meet its short-term obligations.
A good rule of thumb is a ratio of 2:1, meaning your company is in decent financial shape if it has $2 in current assets to meet every $1 in current liabilities during any 12-month period.
Return on investment
It measures the return that an owner receives on their investment in the business. For example, an 8 percent ROI might be what an investor expects. This number lets an investor or owner compare returns available from other forms of investment.
Gross profit margin
This metric is used to understand your company’s financial health by looking at the revenue remaining after accounting for cost of products sold.
The break-even point indicates the amount of sales that must be generated to cover expenses. For example, a consulting firm may need to sell 500 hours of consulting time each month to pay for salaries, rent, telephone and other costs. It’s an important ratio that should be monitored each month in case you need to adjust your sales strategy.
If you have an accountant, sit down and review these numbers as often as you can in order to gain their expert perspective. Or call the accountant immediately if you sense something amiss with your financial statements and seek a quick remedy. Chances are your accountant will have suggestions to help you make changes to improve the financial performance of your company.
[Please note the content in this article should not be considered as advice and is for informational purposes. Please seek advice from a qualified licensed professional specializing in financial statements and ratios]
Please note the content in this article should not be considered as advice and is for informational purposes. Please seek advice from a qualified licensed professional specializing in financial statements and ratios
Before you take action on any of the information above, we recommend consulting with a qualified business advisor that understands your unique needs and situation for your specific business and/or personal plans.