10 Financial Yardsticks for Your Small Business
Below is a MRR and PLR article in category Business -> subcategory Other.
10 Essential Financial Metrics for Your Small Business
Small businesses often overlook a critical component: cash flow. This is the true indicator of how much money is actually available in your business.
Be Cautious with Large Contracts
Small entrepreneurs sometimes take on big orders that can lead to financial trouble. Ronald Lowy, a business administration expert, warns that securing large contracts without adequate upfront payment can strain cash reserves, impacting the ability to pay workers and other expenses. This might show a profit on paper, but cash flow tells a different story.
Certified public accountant Judith Dacey emphasizes the importance of cash flow statements, describing them as vital for understanding whether your business is on track. She shares an example of a non-profit organization that faced financial issues because they relied solely on profit-and-loss statements, which include anticipated payments rather than actual bank balance. This oversight led to bounced checks and workforce reductions, which could have been avoided with regular cash flow reviews.
A cash flow statement begins with your net income and adjusts for various factors. While this process can be complex, a good accounting program can handle it for you.
Track These 10 Financial Metrics
Once you've established a system for monitoring cash flow, focus on these ten financial metrics. Fortunately, software can help automate much of the tracking:
1. Assets
Regularly assess the value of your equipment, real estate, and other holdings. This includes tracking depreciation on items like computers and furniture.
2. Liabilities
Understand all debts, including less obvious ones like payroll taxes. Track repayment progress on loans, distinguishing between principal and interest payments.
3. Cost of Goods Sold (COGS)
For resellers, this is straightforward. For manufacturers, it involves calculating all production factors, including labor.
4. Cost of Sales
Know the total cost of selling your product, encompassing advertising, marketing, labor, and overhead.
5. Gross Profit Margin
Calculated by dividing total sales by gross profit, this metric should remain stable or increase. A declining margin requires immediate attention to pricing and costs.
6. Debt-to-Asset Ratio
This indicates how much of your company’s assets are financed by debt. An increasing ratio may signal financial instability or overexpansion.
7. Accounts Receivable Value
Track outstanding payments. A rising accounts receivable balance might indicate financial struggles among your customers.
8. Average Collection Time
This shows the average number of days it takes for clients to pay you, revealing how long you're extending credit.
9. Accounts Payable
An increase here might simply show greater purchases, but unplanned rises can signal weakening financial health.
10. Inventory Management
Monitor inventory levels to see if you're tying up too much capital in stock. Assess whether business is booming or slowing down.
Understanding these financial yardsticks is crucial, but interpreting the data can be challenging. Don’t hesitate to seek professional advice to ensure you make informed decisions.
You can find the original non-AI version of this article here: 10 Financial Yardsticks for Your Small Business.
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