Do you know your company's numbers?
Knowing your company’s financial numbers is a crucial component of managing and growing your business. Many times, business owners rely on accountants to manage their numbers, and business owners don’t dive in and own the numbers — which will ultimately make or break a business.
Let me ask you, when you receive financial reports from the business accountant, what do you do with them?
If you simply print them out and store them, the financial reports aren't doing your business any good. However, if you’re studying the benchmarks and established metrics on a monthly basis and using your financial information as the foundation for all your business decisions, you're on the path toward being fiscally fit.
So what are the indicators of financial fitness and why are these aspects of business financials so important? How do they help you, the small business owner, meet the challenge to not only maintain, but also improve your fiscal fitness?
As you know, you must annually review budgets and forecasts.
These tools help you refine your business model, review your key assumptions and identify resources and capital needs. They can also be used as a management tool by establishing milestones and the accountability for accomplishing the milestones.
Budgets and forecasts help identify risks and establish benchmarks. This will help you make adjustments to manage risks, reach milestones and measure up to benchmarks. Knowing the break-even point for your business is a tool that enables you to plan for the future with a solid foundation.
Are you one of many small business owners who focus on the growth of your business rather than profitability?
It’s natural to focus on growth, but profits are essential for any small business. Therefore, knowing your break-even point is essential to the overall business operation and is the key to strategic planning and maintaining and increasing profitability over the long term. Successful companies build scenarios to determine the financial feasibility of implementing changes.
Do you compare your business with the industry?
Ratio analysis is a method for determining the overall financial condition of your small business compared to industry-wide ratios. It puts the information from your financial statement into perspective, helping to spot financial patterns that may threaten the health of your business.
For example, current ratio (current assets divided by current liabilities) is the standard measure of any business' financial health. It will tell you whether your business is able to meet its current obligations by measuring if it has enough assets to cover its liabilities.
The current ratio should be part of your business' basic financial planning, meaning it should be tracked monthly or quarterly and compared to a baseline that's meaningful to your business. By keeping a close eye on this figure, you will recognize if it begins to get out of line. This will allow you to take early action to prevent your business from ending up in a difficult negative cash-flow position.
Overall, you need to continually monitor several aspects of your small business if you want to grow.
It's sometimes easy to work “in” your business instead of working “on” your business. In order to succeed, you must spend additional hours reviewing your business plan, understanding your financials, targeting your product or service to the correct group, while maintaining your current customer base, and implementing the initiatives identified for your company’s success.