Every Monday morning, Laura Wright checks three key financial reports for her company.
"I take a look at total revenue received in the past week, revenue to date and how close we are to our annual revenue goal," says the business coach and owner of EPIC at Sales.
"By looking at these three financial reports, I can easily see the financial health of the company," says Wright. "This knowledge helps with setting priorities and consistently hitting our revenue goals."
If you want your business to remain solvent, staying apprised of your company's financial health is a necessity, believes Alexander Pencer, CFO at TFC Title Loans.
"Having a solidified financial plan and understanding of your monthly budget increases your chances of success," he says.
Wright agrees, saying, "Knowing when you may need to increase revenue and by how much before it's needed creates solid financial health. A system to identify potential cash-flow drop off ahead of time alerts you to create new items to sell or have promotions that will generate revenue."
Key Financial Reports
A wide variety of financial reports exist. While they're all important, it's a good idea to keep a close eye on several specific numbers.
"You can have a good idea of how your company is performing by focusing on just a few key performance indicators [KPIs]," says Terry Lammers, managing member of Innovative Business Advisors, which performs business valuation and helps people buy and sell companies.
"Though, you won't be able to run your company by focusing solely on just a few KPIs without ever looking at others, there are some to keep an eye on more frequently."
When examining your financial metrics, keep in mind that they're all interrelated, adds LJ Suzuki, founder of CFOshare, an outsourced finance and accounting company.
"Every financial metric is an abstraction of your business," says Suzuki. "That means they are as interrelated as every other part of your business. For instance, if your sales person pushes too much volume for too low a price, then you won't make enough gross profit to cover your costs."
Here are some of the top financial reports to keep an eye on and why.
"Your current assets divided by your current liabilities equals your current ratio," says Lammers. "The higher the number the better, but ideally you want this ratio to be about 2. That means you have $2 in current assets, or things that can be turned into cash, to cover every $1 of current liabilities, or bills due, within a year."
Current ratio is important because it's an indication of if you can pay your bills when necessary.
"Banks and investors look at this ratio to determine how prepared your company is to handle a temporary dip in sales and if your current assets are capable of covering your debt and expenses," says Lammers.
In order to be profitable, you need to know exactly what your company is spending to make a sale. More sales don't necessarily mean more profits.
—Daniel J. McBride, president, American Eagle Investigations
Daily Sales Revenue
Your sales for the month divided by the number of days in the month equals your daily sales.
"Think of your daily sales as a benchmark for your daily sales numbers," says Lammers. "The higher the number, the better your company is doing."
Subtract your cost of goods sold from your sales and you have your gross profit.
"Of financial reports, your gross profit is important," says Suzuki. "If you're not producing a solid gross profit, it doesn't matter how good your sales numbers seem. You could have $50 million in sales, but if your cost of goods sold is higher than your sales, then you're not going to have the money you need to cover operating costs."
Gross Margin Ratio
Your company's margin ratio measures how much gross profit you're getting as a percentage of sales.
"If your gross margin is 20 percent, that means 20 cents of every dollar of revenue generated is retained while 80 cents of every dollar covers the cost of goods sold," says Lammers.
"If your cost of goods sold is $500,000, and you have $1 million in sales, then your gross profit is $500,000, or 50 percent," continues Lammers. "However, if you increase sales to $1.25 million, but your gross profit is still $500,000, then your gross profit margin drops to 40 percent."
Your margins are critical, says Daniel J. McBride, president of American Eagle Investigations, a private investigative firm.
"In order to be profitable, you need to know exactly what your company is spending to make a sale," says McBride. "More sales don't necessarily mean more profits.
"It's necessary to check financial reports so you know how much you have invested in each unit sold," he continues. "Or how much it costs for your employees to perform a service. If you don't factor in all that time spent per customer into your sale price, you'll eventually be working for free."
Cash flow is net income plus depreciation and amortization. It equals the amount of money being transferred in and out of your business.
"The key financial reports we look at are our cash flow and net income," says Ana Ortiz, owner of Madison Green Family Dental. "At the end of the day, you need to take in more than you have going out. For instance, if you experience a slowdown in business but don't cut employee hours accordingly, you're going to have a cash-flow problem."
"Business owners should know their working capital cycle, also called cash cycle," says Suzuki. "This defines how much cash you need to grow your business. We often measure it as a percentage of revenue or related metric, like days' sales outstanding. You can use these measures to budget how much cash will be required to grow your business."
Suzuki gives an example. "If you are a $1 million business growing to $2 million with a 90-day cash cycle, you'll need approximately $250,000 in extra cash just to fund working capital. Business owners should be budgeting and forecasting their working capital—and entire balance sheet—just like they budget their profit and loss for the year."
Read more articles on managing money.
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