By Cindy Gordon
Business Rescue Coaching, LLC
Many small business owners don’t take advantage of the information within their financial statements to growing their business. Your statements are not just for filing your tax returns. They hold the secrets to your business success and financial stability. Stay on top of these 5 vital numbers to make proactive decisions that will help you grow your business faster and with ease.
1. Bank Balance:
There’s an old adage – “Cash is King.” It refers to the importance of maintaining positive cash flow for the overall fiscal health of a business. A lack of cash can lead to the bankruptcy of a business. Cash is needed to cover day to day expenses such as purchases of goods to be sold, salaries, rent, and to fund the growth of the business. You can finance business growth, but you need a strong and steady influx of cash to ensure that you meet your debt obligations. Banks are very leery to finance a business that doesn’t have success generating cash – unless you’re comfortable with 12 percent interest rates!
2. Accounts Receivable:
(the money that is owned to the business) Many businesses take payment at the time the service or product is sold. If your business provides credit, it is essential to monitor the collection of these funds to ensure they are received on a timely basis. Customers can quickly become delinquent in paying what is owned to you. This could have a serious impact on your ability to meet your obligations. Therefore, regular monitoring and follow up of accounts receivable is essential to a financially secure business.
3. Accounts Payable:
(the money that is owed to others by the business) Your ability to pay your bills is dependent on how much money you have in the bank and how quickly you receive payments from your customers. Not being able to pay your creditors on a timely basis could have detrimental effects on the business such as losing key suppliers for your products; the need to lay off employees you can’t pay or defaulting on a loan that could lead to bankruptcy. Ensuring your payables are paid on a timely basis helps to build your company’s credit rating, which supports opportunities for gaining credit in the future. It ensures you avoid incurring interest charges that can quickly build your debt – especially credit card balances which carry excessively high rates.
4. Gross Profit:
Many business owners are focused on the amount of sales generated. The financial success of your business is to a small extent reliant on sales, but more importantly is the gross profit you make on each sale. If you sell soap at a price of $6 and it costs you $4 to make or purchase, then your gross profit will be $2 per bar. How many bars of soap would you need to sell to make enough money to cover your overhead and show a net profit (see below). By knowing your gross profit percentage, you can compare it to industry average to ensure you are being competitive in your pricing.
5. Net Profit:
Your net profit is the amount of income left in your business after all your expenses (including a reasonable salary to the owner). As a rule of thumb, a strong business will generate net profit between 10 – 15 percent of total revenue. Therefore, if your business is generating $1,000,000 of revenue, a strong outcome for the year would be $100,000 – $150,000 of net profit. Of course, different industries would have different guidelines, but it’s important to keep an eye on your net income to ensure you are accumulating profits for future growth.
If you are a business owner that doesn’t track your numbers and leaves them for your tax preparer, then I can guarantee money is slipping through your fingers. There is a very simple fix for changing things. Work with someone who can help you get the financial information you need and build the habit of being proactive to make smarter and more informed business decisions.
Cindy Gordon is the owner of Business Rescue Coaching, LLC, an executive coaching group that provides leadership and operational support to small business owners to gain more success with less stress. Business Rescue Coaching provides one-on-one coaching, Executive Peer Support groups and leadership workshops. To learn more visit: www.BusinessRescueCoaching.com