There are a lot of numbers in a small business. Most entrepreneurs do a lousy job of reviewing their financial statements while simultaneously trying to manage with the production, sales and delivery of their product. However, numbers are a very powerful tool in business. Without knowing how a business has performed financially, it is impossible to predict where it should go. If as a small business owner, you can’t do a detailed review of your income statement, balance sheet and cash flow statement every month, then here is a short cut.
Here are the only five numbers that matter in your small business:
By definition, the quick ratio (or “The Acid Test”) on the balance sheet. This is your business’ current amount of assets (cash, cash equivalents, accounts receivables) divided by current liabilities. A favorite metric of your bank, the quick ratio is a measure of the financial stability of your business. In most industries, the quick ratio should be greater than one. It shows that your business has more cash available than current money it owes.
It is critical to know your business’ sales close ratio. Of all the prospects your business writes proposals for, how many do you win? This is a key number since it should not be too low or too high. If it is too high, your business is not talking to enough prospects or your prices are too low. If it is too low, you may not be qualifying your prospects enough before you spend time preparing proposals for them.
While all customers are important, not all of them are created equal. Who are your ten most important customers? This is measured not only by revenue, but also by their referrals, the additional products they buy, feedback they give, retention, or their superior brand power.
For days sales outstanding (DSO), that is the average number of days it takes for your customers to pay? The smaller the number, the better, since your business can use that cash quicker by reinvesting or taking it out as profit as the owner. The number should be 133 percent of your payment terms with your customer. For example, if your terms are 30 days, your DSO should be 40.
How much positive operating cash flow did your business produce last month? Profit is important, but cash flow is king. This number is found in your business cash flow statements. By definition, cash flow is your monthly profit, plus the change in accounts payable, the change in accounts receivable, and the change in inventory. The higher this number is monthly, the healthier your company is.
Know these numbers, and you know your business. What numbers are critical in your business?