To effectively operate your business, no matter what your business is, you need to know a LOT of numbers. At the least you have your Profit and Loss (P&L) report that you need to review at least monthly. But running your business can be hectic enough without doing a deep dive into the numbers with your scarce time. Because of this, a lot of owners do a very bad job of monitoring their financial performance and position because they don’t look at them regularly or don’t know what they really mean.
What a business owner must understand is that financials are the lifeblood of their business. Your financial reports are the most important tool you have for managing your business and knowing its health. Knowing these numbers and being able to make informed decisions and take timely action often means the difference between success and closing your doors.
Finding Your Metrics
An important first step is determining your “shorthand” metrics. Those are the numbers, among all the others, that best define and reflect your business operations. By reducing the larger reports to easier to understand metrics, you can more readily keep an eye on these “snapshots” to tell when things may be going off the rails. An accountant or CPA from CustomOne CFO & Controllers can assist you with not only your financial reporting and review, but in determining effective metrics for your business.
One of these metrics is The Acid Test on a company’s balance sheet. This metric is your current assets (cash, accounts receivable, etc.) divided by your liabilities (accounts payable, loans, etc.). This metric is also important because most banks use it when they review you for a loan. This quick ratio shows the financial stability of your business with a ratio showing more assets than liabilities (a number above 1.0). If you get a number below one, you need more revenue or too much A/R. The ratio can be improved by increasing your profitability.
While it is important to know your profit, it is more important to know your cash flow. To find out your positive operating cash flow, look at your cash flow statements. Cash flow is simply the total of your monthly net revenue (profit) accounting for any changes in A/P, A/R and inventory. The healthier your business is, the higher your Operating Cash Flow metric will be.
This can all be confusing and many business people in operation for years don’t know how to read their financials. Setting up efficient, regular financial reports with an accountant or CPA from CustomOne CFO & Controllers will assist you greatly. They will explain your financials in easy to understand terms and help you determine the shorthand metrics you can monitor to have confidence your business is running well.