Most small business owners don’t jump into their entrepreneurial dream because they are particularly excited about the accounting process or the list of accounting chores that require daily attention. If you are excited about that, you have a leg up on the rest of us.
Although we don’t believe every small business owner needs to be an accountant, small business success starts with having a handle on a few key metrics that speak to the overall financial health of your business.
5 Metrics Every Small Business Owner Needs to Understand
Understanding these 5 metrics will help you know if your business is financially healthy. If you aren’t sure of any of these, take some time with your accountant or other trusted financial adviser, and he or she will be able to explain any issues that are unfamiliar to you.
Income is at the top of the list because it’s probably the most important. A small business without income just won’t last long. As a business owner, it’s important to pay attention to daily income, as well as monitor and track it weekly, monthly, quarterly, and annually. We naturally impact the things we pay the most attention to, so business income should be on the top of that list.
Are you on top of how much it costs to do business every month? In addition to the cost of goods sold, you can’t ignore the overhead costs associated with doing business. These expenses include your lease, utility payments, paper goods, and even items like paper towels in the bathroom. Next to income, you need to have control of your business expenses.
3. Cash Flow
The balance in your business banking account at the end of the month may not be the best measure of your cash flow. One metric you can use is to divide your income by your liabilities to get a ratio that reflects your cash flow. A ratio of 2:1 or twice the assets to liabilities is ideal (granted, this can be a tall order for many small businesses), but if the ratio falls below 1:1, it’s a warning sign that you don’t have enough cash flow to support your business operations.
4. Accounts Payable
Staying on top of your Accounts Payable Aging is important for many reasons (including how it impacts your business credit profile), but it can also be an opportunity to reap additional profits by taking advantage of the quick payment terms many suppliers offer customers who pay their invoices quickly. For example, many suppliers offer discounts if you pay your invoice in 10 days as opposed to 30 days.
5. Accounts Receivable
If you offer your customers payment terms, it’s important to stay on top of how long they take to pay an invoice. If you offer 30-day terms, every day a customer takes beyond 30 days to make a payment has the potential to impact cash flow negatively. What’s more, the difficulty of collecting late invoices will become exponentially more challenging as time passes.
The most successful small business owners have a strong understanding of these metrics and use them to measure the financial health of their business and build a successful enterprise.
Make Your Accountant a Consultant
It’s tempting for many small business owners to be very transactional with their accountants. In other words, the only time they meet with them is when they have taxes to pay or quarterly filings to make. However, we’re big fans of leveraging their perspective and insight with a more consultative relationship.
Your accountant looks at your business from a slightly different perspective than you do, so leveraging that point of view to improve the overall health of your business and increase your profit potential is a good approach. Consider establishing a cadence for regularly meeting with your accountant to talk about what he or she sees within your financial reports and if there are any areas where you can either save or improve by tweaking the way you do business.
The cadence will be up to you, but a semi-annual meeting might be just as effective as a quarterly meeting depending on your particular business. Don’t try to do it at the same time your accountant is pulling your taxes together, but set aside some time dedicated to taking a deep dive into your financial data. Don’t be surprised if he or she points out a couple of things that are obvious to him or her that you had not considered before. That difference in perspective is the reason you want to have this relationship.
Your accountant will likely appreciate the opportunity to take your relationship to the next level to help you build a successful business, but you should be prepared to pay for the advice. It likely won’t take too many visits before you start to see some value from the regular conversations with your accountant.
Every Business Needs a Profit Expert
A successful business is all about creating profits, and every business needs a profit expert. Most of the time, that expert becomes the business owner, but it doesn’t have to be. In addition to marketing (or promoting your business) and production (or the ins and outs of running your business), the accounting process is a critical part of every business—and where the profit expert lives.
Not every small business owner needs to be an accountant, but most successful business owners have a real understanding of what the financial data in their reports are telling them and use that information to make informed business decisions. Many of them, whether they have a regular meeting cadence with their accountant or not, are in sync with their accounting process and use that information to look for opportunities to save money or increase profit potential.
Automate Bookkeeping and Accounting
Several small business software programs make accounting and bookkeeping much simpler for business owners and also enable your accountant to access your financial data remotely—making it easier for them (and you) when it’s time to file quarterly tax reports, pay your payroll taxes, and file your year-end tax statements. We recommend you speak to your accountant to find out which program they recommend so you know it will successfully integrate with the system they use.
Is Your Small Business in Good Financial Health?
Although it’s not really rocket science, it does require effort and discipline as a business owner to understand what’s happening financially within your small business. It may require you to learn a few additional skills, but these suggestions are a good way to start and will help you have a better understanding of how your business is doing.