Understanding Your Business’ Finances: 7 Key Numbers You Need to Look At
Most entrepreneurs focus on how they can make their products/services better, increase sales and earn a profit. However, business owners should realise that their income isn’t the only thing that they need to look at, as there are other important figures that they should closely monitor.
Although a business may be hitting its sales quota, without looking at its key financial numbers the business might risk losing money instead of earning it. For example, if the sales price of a product sold is below the cost of selling it, the income from sales will not cover the expenses of running the company.
To ensure that your business’ finances are on the right track, we have outlined the key financial aspects that should be closely monitored.
- Cash is King – Essentially, this means that it is vital to monitor the amount of cash that goes in and out of the business. The simple formula in deriving this number is to subtract the cash inflow (i.e. income generated from sales of goods or services) from the cash outflow (i.e. bills, payments, tax, etc.). If the amount of cash inflow exceeds the cash outflow, it is a good sign that you are operating in the black. However, if it is the other way round, then it is time to look for strategies on how you can improve your cash flow.
- Gross Margin – This figure is something to monitor as it shows how much money you have after you have subtracted the cost of goods sold. It shows you whether the price on the goods you sell is sufficient to cover the expenses in operating your business.
- Bottom Line– Another key number to look at is net profit, or what is also known as net income or net earnings. This number shows the business’ total income after all expenses (including tax). This figure helps you determine your business’ financial standing.
- Sales – Keeping a keen eye on whether or not your business is generating sales is important. This figure describes if you are earning sales or not, and also helps you determine the factors that are making your sales rise or decrease. Figure out the key factors that are making your sales increase as this could help you retain the momentum. On the other hand, it is also important to analyse when there is a dip in your sales figures so you can make the correct adjustments.
- Profit and Loss Statement – Your profit and loss (P&L) statement is another crucial tool to use as it provides you with a snapshot of the financial position of your business. This is calculated by taking the business revenue and subtracting expenses. If the number is positive, this indicates the business has made a profit; or if negative, a loss has been incurred.
- Managing and Monitoring Inventory – Particularly for retailers, it is essential to measure inventory every week. If you see an increasing inventory, it usually indicates that there is a sales problem. Regular monitoring of inventory will help prevent overstocking which leads to potential waste, and eventually, reduced profits.
- The Quick Ratio – also known as ‘the acid test ratio’. The quick ratio is found on a business’ balance sheet and shows its financial stability. This number is measured by dividing the company’s current assets and its current liabilities. The ratio that you should end up with should be >1, which indicates that your business has more cash available than the current money it owes.
Regularly monitoring these numbers can be tedious and not as exciting as making a sale. However, these figures are important if you want to see where your business is currently at and if it is heading in the right direction.
To gain a firmer grasp on your business’ finances, and to help set up and maintain a solid plan for the future, it is wise to seek advice from a professional. At McKinley Plowman, we have an expert team of financial and business professionals who can guide you through your financial position.
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