While many small business owners have a basic knowledge of bookkeeping and financial management, few have an accounting background. Most would rather stay focused on doing what they love most: running their businesses. A small business owner’s time is much better spent on fine-tuning their product line as well as providing the best customer service possible. That said, there are some crucial numbers every business owner should have a grasp of for continued small business success.
Tracking Key Performance Indicators
Key performance indicators are the tools and numbers a business owner can look at daily, each week, once per month, quarterly, at the end of the year, or on a project by project basis. These numbers can help business owners to:
- Measure/define progress
- Make informed business decisions
- Budget effectively
- Allocate resources intelligently
- Address inefficiencies
- Detect fraud
- Have peace of mind
While you may not want to spend too much time analyzing reports or reviewing financial statements, you should ideally be aware of these critical measures, metrics and numbers:
Sales
Of course, your sales are a primary indicator of how your company is doing. Are they rising, falling or staying the same? Are you aware of seasonal or industry trends that could be influencing sales? Are you taking bottom-line performance into consideration while analyzing your sales?
Accounts Payable
Money owed to suppliers and vendors.
Accounts Receivable
Money that your business is owed.
Cash Flow Statements and Forecasts
A cash flow statement is a report summarizing cash movement in and out of your business at any given time. This number should be analyzed in light of operations, financing and investing activities to calculate current cash amounts as well as likely future totals. Forecasting cash flow usually involves adding your cash in the bank plus expected cash in the coming weeks minus outgoing cash over the same period. Tracking these numbers can help you to anticipate and handle profit lulls and shortfalls.
Equity
Your total money and property investments that are retained in the business by owners/shareholders.
Debtor Days Outstanding
The average number of days customers are taking to pay off your invoices; multiply sales/accounts receivable by 365. An increase in this number could indicate a problem for your cash flow, while a decrease is positive.
Creditor Days Outstanding
The average number of days you’re taking to pay suppliers; multiply purchase amounts/accounts payable by 365. (If this number is lower than your debtor days outstanding, you should step up debt collection.)
Balance Sheet/ Statement of Financial Condition
This is a summary of your company assets/business liabilities for a specific time period.
Income Statement/ P&L Profit and Loss Statement
This report summarizes your gross income/revenue minus your cost of goods sold and operating expenses.
Gross Profit Margin as Sales Percentage
A rise in this metric tends to be a good sign, while a decrease could mean that your overhead is too high, your product pricing is too low, or that there are flaws in your business model. It is indicative of the amount that you charge customers versus the cost your vendors and suppliers are charging your business.
Stock Turnover/Inventory Days
Stale inventory could be costing you! This measure refers to the average number of days your inventory remains on your shelves before it is purchased. Calculate this number by multiplying your purchases/inventory by 365. The lower this number is, the better, as this means you have more cash flow available to grow your business.
Accounting or financial management may not be your forte, but an awareness and focus on these key numbers is crucial to your ongoing success. That’s where a bookkeeping service Atlanta knows and trusts can be invaluable. Hire a seasoned professional to help you stay on track with these key business numbers, and you’ll increase your odds of having a business that continues to continue to grow and thrive.