5 Financial Metrics Small Business Owners Should Track
Operating a small business is an exhilarating and, at times, overwhelming endeavor. There are so many details to keep track of that it's easy to forget about the nuts and bolts of your organization's finances – especially if you didn't start as a "numbers person."
Whether you're the one who is assembling your financial reports or you've hired a professional (like us) to do it for you, it's essential for you to know which of the numbers are most important and what they mean in terms of the decisions you make and your assessment of the health of your business overall. Below you'll find our list of 5 of your financial report's most important elements and what you can do with the information.
1. Profit and Loss
Every quarter, you should refresh your business's profit and loss report to understand your bank needs and your tax reporting needs. It is the single, at-a-glance snapshot of your bottom line that you can use to drive your own decisions and that you can show to an outsider for them to gauge your strength. If you have a reconciled balance sheet, it will ensure that everything in your Profit & Loss is captured.
2. Budget Versus Actual
Think you're sticking to the plan based on what you see in terms of your bank account? The truth is that if you compare what you've budgeted as compared to what you've actually spent, it will give you a far better sense of whether you're staying on track and what kind of adjustments you need to make.
3. Cash Flow
Most people consider cash flow the most telling metric of all, and cash certainly is the lifeblood of any company. If you're not keeping your eye on your cash flow, you could find yourself caught unaware and flatfooted when making essential payments. Make measuring your cash flow (as well as your cash burn – the amount you go through monthly) and your runway (how much you can operate based on your cash on hand) part of your regular business health check.
4. Projected Profit Loss Versus Actual
A big part of your annual financial plan should include a projection of what you believe your profit and loss will be, as well as a budget for each of your expense areas. The projection will allow you to compare what you projected to your actual profit and loss and then review where things went awry. Some may be explainable and worthwhile, and others may be warnings of things getting out of control.
5. Financial Ratios
Ratios are among the most useful metrics that a small business owner can use to determine their organization's overall financial health. Among the most important are the liquidity ratio (how much cash you have on hand to pay the monies you owe); and your profitability ratio (profit as it compares to revenue).
Each of these elements is extremely beneficial in helping you understand where your money is at any time. If you'd like to discuss how our services can help you run a successful business, please contact us for more information.
