My questions is – Are you watching either?
As small business owners often responsible for ALL aspects of the business, it may be easy to “forget” to review the business’ financial figures. You may have a feeling things are not going as well as you’d hoped – who wants to see that? Or – the money is rolling in and checking the actual numbers doesn’t seem as important because you see the frequent deposits and have a sense that all is well.
All too often while reviewing the five key categories of a business with my new clients, when we get to the financial pillar, I find one or more of the following key financial metrics either not tracked or not reviewed on a regular (i.e. monthly) basis.
How about you? As a small business owner, how would you rate your diligence when it comes to reviewing the following?
Profit and Loss Statement
This document shows your business’ gross income, expenses, and bottom line net income (the profit or loss). Not only are these overall figures important to knowing if the business is profitable, sustainable and growing, but also, the specifics within the statement reveal a wealth of important information such as:
- Which products and/or services bring in the most sales and highest profits
- Which products and/or services should be reduced or eliminated
- Which categories/demographics of clients are most worth pursuing
- Which marketing expenses are most effective in bringing in new clients
- Which operating expenses should be reduced or eliminated
- Reviewed on a monthly and quarterly basis over time, the P&L reveals seasonal fluctuations to be expected and addressed.
Cash Flow
This report shows actual cash in and out over a period of time, revealing how much cash is available at the end of that period. With fluctuations in timing of payments following invoicing, and expenses incurred outside of normal operating expenses, a company that appears profitable on the P&L, may not have the actual cash it needs to operate smoothly month to month.
An example where cash flow became critical to a client – the owner of an HVAC company – happened with his need to purchase additional equipment and vehicles for growth of the business. He kept running into difficultly paying for these as some of his commercial clients were far behind on paying for services already rendered and invoiced. This led to a significant tightening up of his payment policy and follow-up going forward.
Which leads to another key financial metric –
Accounts Receivable
Do you have clients/customers who owe you money for already-provided products and/or services outside of an agreed upon timeframe? If so, you are not alone. I would estimate more than 60% of my new clients are in this boat when we first meet. Sometimes they are hesitant to remind people that money is owed, thinking this will in some way offend their clients. In other cases, time has just gotten away from the business owner and they forget to send a reminder. Reviewing accounts receivable on a monthly basis keeps the business on top of owed money. Having a system for reminding customers of owed money is critical. Your customers are likely just as busy as you are and sometimes a bill is simply forgotten.
One of my clients, a drug and alcohol testing company, recouped $25,000 in one month after simply sending one reminder notice to all of his past due accounts.
Of course, these are only a sampling of important financial numbers to track but get these three under control and watch both your confidence in your financial acumen improve and your business grow. Who wouldn’t want to see that!
If the monetary aspect of your business still has you flummoxed, let’s set up a brainstorming session and get you financially streamlined!