The Financial Numbers You Should Monitor to Grow Your Business
If you use accounting software, you probably have access to a multitude of financial reports that provide insight into the performance of your company. If you're like most busy entrepreneurs, however, you don't have the time, inclination, or training to comprehend complex financial numbers.
Many small business entrepreneurs, in reality, concentrate entirely on their areas of expertise, ignoring the big picture. Unfortunately, no matter how great or dedicated you are to your craft, product, or service, if you neglect the financial side of your business, it will most likely fail.
Let's look at the seven numbers you should evaluate every month to help you increase your profits and keep them there. You won't need to be a professional CPA to comprehend and extract these statistics from major financial statements, so don't worry. However, to run these reports, you'll need some form of accounting program.
You'll be able to make smarter, more forward-thinking decisions once you have a clear line of sight to the financial records that assess the health of your organization.
Profit & Loss
You've probably heard the expression, "What's the bottom line?" It's taken straight from the profit and loss (P&L) report. The final line of a profit and loss statement is the number that reveals whether a company made a profit or lost money.
Profit (sometimes known as "net income") is the amount of money earned after all expenses have been paid. It's best to review your P&L frequently (at least once a month) so you can:
Keep track of your expenses and search for ways to cut back if they're impacting your bottom line.
Determine when you have less work and make less money throughout the year so you may know when to scale back or increase your sales efforts.
Help to inform your revenue trend—you may be increasing your sales, but if your profits are being slashed due to expenses, you can figure out why and solve it. You may, for example, strive to cut costs or raise your fees.
Ultimately, if your organization isn't successful, or profitable enough for you to pay yourself what you want, it won't last. Keep this "bottom line" in mind as a business owner to ensure you're making the money you want.
Equipment, office supplies, transportation, training, and advertising are all examples of items that must be invested in to run a successful business. These costs can quickly outpace your revenue, depending on the type of business you run.
It's vital to enter your spending into your accounting software monthly and double-check the numbers. They'll be included in your P&L statement, which shows whether you're making or losing money, assuming you make the effort to do so.
However, many accounting software packages feature an expense report that displays you the many categories in which you're spending. Examining your spending patterns will help you determine where you might save money if necessary.
Your only responsibility in terms of keeping an eye on expenses is to make sure they don't outpace your revenue. The only exception is if you're making a long-term investment, such as hiring a new employee or purchasing new equipment that will pay off in the long run.
Have you ever wished that you could shake a tree and money would fall out? Accounts receivable, or A/R, is the closest you'll get.
A/R stands for "accounts receivable," which is a fancy way of saying "money I owe." This is the total of your unpaid invoices, and it appears as a line on your balance sheet, another basic financial report. If your accounts receivable are large, you have a lot of money in the treetops.
Take a look at A/R if you're having trouble with your P&L numbers. Small business owners frequently experience financial difficulties as a result of late or unpaid invoices. It pays to stay on top of clients to collect payments on time and keep cash flowing. To keep things on track, many accounting software programs include automatic payment reminders.
And understanding what your A/R numbers are at any one time can help you make better judgments about what and when you invest.
Profit by Client
Not every client is the same. Some are far more profitable than others in terms of money. The best clients are those who generate the most profit, not those who pay the highest fees.
Getting a big-name client might be thrilling, but you may need to invest in more equipment, insurance, travel, and other expenses. So, while they are paying more, they are also spending more. Some of your smaller clients, on the other hand, may not pay a lot, but their projects build up to a lot of profit.
Some software systems include revenue by client report. While seeing how much each client is "worth" to your company on this financial statement might be eye-opening, it's also useful to go one step further and figure out how much profit they create.
To figure this out, remove all of the expenses involved with working for a client from the total fees you got from them. That’s your gross profit. Divide the profit by the approximate number of hours you spend on their work if you keep track of the hours you spend working with them. For this client, that is your "hourly wage."
Compare the wages of different clients to see which ones are the most profitable for you. Concentrate your marketing efforts on attracting more profitable clients, even if they aren't the "biggest" projects. In this manner, you'll make the greatest money in the shortest amount of time.
Cash flow is one of the most difficult concepts for small business owners to grasp. It refers to the actual cash flowing into (revenue) and out of (expenses) your business over a set period of time. Your cash flow statement reveals how much money you have at the end of that time period.
You can have a cash flow problem even if your P&L displays a constant profit. Perhaps you were invoiced for a large project, but the payment conditions are 60 days, so you won't get paid for a while. Meanwhile, your spending may be fair based on your revenue, but if you need to make a large investment in equipment while you're waiting for that cash, you'll find yourself short on cash.
Accounting experts recommend that you review your cash flow statement regularly to ensure that you are appropriately timing your purchases and that your clients are paying on time.
Do you want to know how much money you make from each item you sell and how many times that item is sold? An item sales report is available in many accounting software solutions.
This is crucial data because it shows you how profitable each of your products or services is. This is where you'll check to determine if your best-selling product is genuinely profitable. You may also see how discounts on certain products affect their profitability. Financial statements, such as the item sales report, provide useful information that can help you decide which goods are worth your time and attention and which aren't.
Do you want to know how profitable your projects are as a whole, especially if you have workers working on them? Enter the project profitability details report.
Some accounting software systems include a Project Profitability reporting tool that allows you to track the profitability of your projects. It takes into account the time and expenses that your team members track for projects, allowing you to make better project management decisions in the short term as well as better business decisions in the long run.
The Bottom Line
When it comes to financial numbers, the old saying, ‘Failing to plan is planning to fail’ really is the bottom line.
Whether you like it or not, numbers tell the story of a company's health. They can provide you with information such as:
What kind of clients to go after to be most profitable
How much do you need to make on a project or product to make it profitable
What kind of capital investments are reasonable and affordable
When to make capital investments in your business
Which clients owe you money – and when
What kind of profits you can expect to make based on past performance
Real-time cash flow
These are critical indicators that will guide both large and small business decisions. Starting with the cash flow statement, accounting experts recommend verifying these financial statements on the first day of each month. You will be able to change your business plan as needed as a result of this. Additionally, as you become more accustomed to examining data daily, you may discover other reports that may assist you in determining the performance of your company.
Meanwhile, prioritizing the usage of these 7 numbers and their accompanying financial statements is a long-term investment that will pay off.