Having a financially fit company involves checking in on some of your most important financial stats. After all, how can you know where you’re going if you don’t know where you are? B2B CFO® is here to help you.
Most business owners admit they are busy putting out fires and working with customers, rather than pouring over financial statements. But this could be a mistake if left unmonitored for too long. It’s important to keep a close eye on the critical numbers that can help you predict a lag or even the success of your business. There’s always time to increase net profit, so every month, you should input your transactions and use the resulting figures to make smart business decisions moving forward.
To help ensure that your business stays ahead and profitable, take the time to stay on track of these key financial numbers.
Operating cash flow offers tremendous insight into the financial health of the business. This figure is computed by subtracting your operating expenses from the money your company generates during normal business activities. It adds back depreciation to your net income and adjusts for working capital needs like changes to receivables and inventory. Always make sure to have the necessary cash flow to meet all monthly business expenses.
Profit and Loss
This figure is found on your P&L statement, which is a snapshot of your company’s income (sales and revenue) minus expenses during a specific period of time, which is generally monthly, quarterly, every six months or yearly. Knowing your company’s profit and loss over time allows you to project earnings and make realistic plans for the future, both short term and long term.
Keeping a close eye on sales is important, as a dip could be a warning sign. In the same respect, it’s important to pay attention when sales are up. Determining why business is good at the time your company’s on an upward trajectory is easier than trying to figure it out later. It’s also important to keep track of sales metrics such as, total sales by sales period, sales by product or service, sales by lead source, new vs. returning customer, and profit per sale. Tracking these activities allows you to see what’s working and repeat it, or what’s not working and eliminate it.
One mistake many businesses make is to believe that price alone drives sales. Your ability to sell is what drives sales and that means hiring the right sales people and adopting the right sales strategy and superior products/services. Pricing your products too low can have a disastrous impact on your bottom line. Overpricing a product can be just as detrimental since the buyer is always going to be looking at your competitors pricing. A fundamental tenet of pricing is that you need to cover your costs and then factor in a profit. Know how much your product costs and understand how much you need to mark up the product and how many you need to sell to turn a profit.
Closely related to cash flow is your net income, which is also known as your net earnings and net profit. This figure is calculated by subtracting all your expenses, including taxes, from your income. Your net profit is a good indicator of whether you’re earning or losing money.
Also known as your gross profit—and related to price point—this figure reflects how much money remains after the actual cost of your merchandise is subtracted from the selling price. If this figure is low and insufficient to cover your operating costs, such as salaries, rent, marketing and utilities, then you’re likely not charging enough for your products and services, or your cost to produce or buy out your product/service is out of line.
Make it a habit to monitor your inventory numbers on a weekly basis to ensure that the amount of inventory isn’t gradually increasing, as this could be a sign of sales trouble. By tracking inventory on a regular basis, you can spot problems early enough to avoid the negative effects of excess inventory, which include storage costs, reduced profits, a drain on cash and potential waste.
Good business health isn’t achieved by accident. It takes a commitment from the owner and management to consistently review these critical numbers, establish key metrics, and develop best practices so you’ll see warning signs before any financial emergency strikes.
B2B CFO® provides privately held companies with experienced management advisory talent when they need it most. We are your trusted business advisor providing experienced professionals with specialized skill sets to help you address pressing financial challenges, mentor staff, and help you make critical business decisions.