You can’t run a business on good intentions and hard work alone. You need to stay on top of critical financial information to see that your business is fiscally healthy and learn where changes need to be made in order to grow. Here are the numbers you need to watch, as well as why and how to do it.
This is a record of your company’s assets and liabilities, which is the net worth statement of your business at a given point in time. At a minimum, a business should have a balance sheet at the end of its year. The amount by which your assets exceed liabilities reflects the owner equity. (In a corporation this is called shareholder equity.)
The balance sheet is important because it displays the financial position of the company. If assets are substantially greater than liabilities, the company is in a good position, but if liabilities are more, the company may be in trouble.
Profit and loss statement
The P&L statement, also called an income statement, displays the income and expenses of a company on a month-by-month basis. Income is the company’s fees, revenues from sales, and other types of income. Expenses usually are grouped into two categories: fixed and variable.
- Fixed expenses, which are the same each month, include rent or mortgage payments and property taxes, salaries, insurance premiums, and utilities (even though costs may vary slightly month to month).
- Variable expenses include advertising and marketing expenses, commissions, cost of materials for creating inventory, travel and entertainment costs.
The P&L statement shows whether the company is making a profit or experiencing losses. By looking over the P&L statement, you can see whether revenues are growing or declining. You can also work to reduce variable expenses in order to favorably impact profits.
LinkTech, a fast-growing IT services provider, found it increasingly difficult to gain visibility into their operations and financials. Their custom-designed financial applications and spreadsheets were a very manual process and nothing was integrated. It was a challenge to run reports they needed to understand the entire business. Now using digital technology, they easily manage profitability and cash flow giving the company more confidence to expand and grow.
Cash flow statement
Cash flow reflects the stream of money in and out of the business: “in” through revenues and other income and “out” through the payment of expenses.
Monitoring cash flow is critical to business survival. The issue with cash flow is having adequate funds on hand to pay bills when they come due, and revenues may not necessarily match this requirement.
Brazilian entertainment company, Cia dos Palhacos, was looking for a single solution to help run their entire business administration needs. They found a technology solution that was easy to implement and easy to use, providing the added control to their cash flow they were looking for. Now they can monitor their business finances, and have the ability to plan more efficiently for the future.
Cost of goods sold
If your business maintains inventory, you should watch your cost of goods sold (COGS), which is the costs for creating a product or acquiring items for sale. It is opening inventory (what’s on hand at the start of the year), increased for purchases throughout the year and reduced by goods sold, to arrive at ending inventory.
Tracking COGS is mandatory for tax reporting purposes. But it’s also essential to the computation of gross profits, explained later.
How to track your numbers
In the old days, a paper ledger was used by businesses to record their financial activities. Then the owner, or a CPA, controller, or other numbers person would assemble the numbers into the needed financial statements to determine how things were going. All that has changed.
Today, you only need to use a single point of entry for financial data and, with simple keystrokes, create the needed financial statements, ratios, and, other vital numbers for your review. Even better, today’s technology enables you to not only view but also help analyze what’s going on. Easily compute key ratios to assess fiscal well-being and use charts and graphs to take a long view of your company’s operations.
Here’s a list of some key figures that technology can help you compute for your review:
- Current ratio compares assets to liabilities.
- EBITA, which stands for earnings before interest, taxes, depreciation, and amortization.
- Gross profit is the money remaining from revenue (reduced by COGS) after subtracting direct costs of sales. It can be expressed as a percentage called gross profit percentage or margin.
- Net income is the bottom line for your business, reflecting all of the costs (direct costs, taxes, interest, etc.) to earn it.
- Quick ratio is cash plus accounts receivable divided by accounts receivable, which indicates the amount of cash on hand to pay bills.
ArcLight Cinema operates movie theaters across the United States. Their internal systems for managing ordering and receiving were holding them back from expanding. They found a software solution that provides better integration with their POS system for tracking their restaurant, concession stands, and movie ticket sales and gives them reliable data on their inventory available at their fingertips. They can now focus on the customer experience to ensure people keep coming back to their theaters.
When to review your numbers
Once the data is logged, it’s up to you to regularly review the information. The frequency depends on the type of data you’re looking at as well as your business needs. For example, you may only need to look at your P&L statement on a monthly basis, and your balance sheet even less frequently. However, you should be tracking your cash flow at least once a week if not more often.
As a business owner, you don’t have to become an accountant to understand and analyze your numbers. You can use technology to translate your raw data into information that you can use to grow your business. Remember, if you want to raise capital or take out a loan, having organized financial data will be critical for doing so. Solid data, along with quick access to that data, will give financiers the confidence to provide you with the capital you need to compete and grow. And again, technology is an essential tool toward that end.
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