No matter the type of your business or industry, keeping track of these six financial indicators will help your business run more efficiently and become more profitable. Conversely, neglecting these numbers may have a serious damaging impact on your business and even threaten the existence of your business.
Your company’s “state of health” is based on managing one or more of the following key financial indicators:
1. Understanding your cash position is vital. That’s why business owners should reconcile their bank statements monthly. Your bookkeeper or accountant should make sure that the general ledger agrees with the statements, meaning all deposits and withdrawals are matching. For example, if your bank statements show a $2,500 withdrawal, that should be reflected in your ledger.
2. Keep track of the items in your shelves or in your warehouse. If you have some inventory that you purchased last year, and it’s been sitting idle, that inventory should be discounted and turned to cash immediately. Buying too much inventory or insufficient inventory may hurt your business.
3. Break-even analysis. Knowing your monthly expenses (both fixed and variable costs) will help monthly goals and sales expectations. If you need $50,000 to cover expenses in the month of April, you then manage to sell enough to cover those expenses. Based on the above analysis, there may be a need to slash some expenses, to launch a new advertising campaign, or look into a new and less expensive supplier.
4. Payroll expenses. There should be a relationship between payroll expenses and revenue. Businesses may face an increase in labor expenses and it may be necessary to adjust the payroll or increase the sales of products and services.
5. Total revenue vs. unit sales. Your business may experience a significant increase in total revenue due to the price increase, and the business owners may be presented with a false picture. Tracking the sales numbers by unit will give you a more detailed picture. This method of tracking will give you a chance to track if customers are returning your products, or if you need a more comparative analysis.
6. Cost of sales. In a competitive marketplace, controlling the cost of sales is a key aspect to the success of your business. Quality control, customer service, and negotiation for the best possible payment terms with vendors are steps you can take to ensure reducing the cost of sales. Additionally, you can optimize the shipment process, optimize packaging, and evaluate the pricing of raw materials.
These financial indicators are dynamic in nature and may frequently change. The key to your success is to know your numbers monthly. A simple and brief report will give you the tools to keep your business on the right path to success.
Consultants can be instrumental to helping you create the reports, translate the ratios in plain English, and guide you to manage your business effectively.
Well, I think that there's a very thin dividing line between success and failure. And I think if you start a business without financial backing, you're likely to go the wrong side of that dividing line.