If you’ve been brought to this page, there’s a good chance that you’re a business owner or looking to become one. There’s a lot that goes into business ownership. Out of all the experiences I’ve had in life, being a business owner has helped me grow in ways I otherwise could not have. But, accounting and math are not what motivated me, and I’d say, most business owners to take their beginning steps. Even so, I am going to lay out important small financial metrics every business owner needs to know about to become more successful.
I want to preface that I am not an accountant, but because I’ve had years of experience being a business owner, there are many financial metrics that I’ve come to learn. I’ve come to learn a few of which are crucial. There is great power in knowledge when it comes to being a business owner. These small important metrics would have saved me a lot of time throughout the beginning stages of starting a business. If only I had known these things back then! As much as I wish I could go back in time, I want you, as a potential business owner, to take advantage of the things I’ve learned throughout the years.
Understanding your business’ finances and what your numbers are telling you is crucial in running a successful business. Your finances tell you just about everything; whether your business is profitable or if you are more likely to hang up that “out of business” sign. Furthermore, here are the five important things that have helped me run successful businesses.
5 Small Important Metrics You Need to Understand:
Income is defined as money received, especially on a regular basis, for work or through investments. If your business isn’t producing an income or revenue, nothing else happens. Products or services don’t get bought. No one gets paid. Employees leave. There’s no growth. Your happiness dwindles. Sad isn’t it? To put it simply, without revenue, businesses can’t sustain any operations. To avoid this, track your numbers daily, weekly, quarterly, and annually. Numbers should become your best friend as a business owner. As you are continuously tracking your numbers, you will be able to track how well your business is doing (or not doing).
For a lot of your numbers, you will most likely have an accountant or CPA, if you think you don’t need one, I’d highly suggest you think otherwise. There is so much wealth of knowledge to be had when you take the time to consult with your accountant or CPA about numbers. They can help you with all these metrics I am talking about.
These numbers will become important to lenders as well. When you need a loan or a business LOC, lenders will want to review your numbers to evaluate whether or not you have the income to sustain periodic payments. You want lenders to know that your company is one of trust and value.
When it comes to expenses, things can become pretty complicated. More than likely, there are probably lots of things you didn’t think you needed to spend money on to make a business run. However, it doesn’t have to be that complicated. The most important thing to know is what it costs to do business and whether your income is enough to meet those expenses.
You need to also calculate how large of a margin you would like between those two numbers. This is otherwise known as your profit. A profit is a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something. After all, profits should be one of the motivating factors going into building a business. Seeing the numbers of your profit makes all the hard work you do worth it.
Granted, there are specified companies that forego profits in the beginning stages and focus more on growth. For this to happen, companies will rely on investor income until they reach the point of profitability. If you are in these beginning stages, times can be stressful, but don’t lose sight of what you know your company has the ability to become. Rarely a startup company sees immediate success. The beginning struggle is actually quite normal.
3. Cash Flow
Have you ever heard the term, “Cash flow is king?” If you haven’t, plaster it all over your office. Frame it and hang it up in your bedroom. Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. It is not enough to have money in your business checking account. Positive cash flow says a lot of things about a business. For example, it indicates that a company’s liquid assets are increasing. This is crucial in settling debts, reinvesting in business, returning money to shareholders, paying expenses and providing a buffer against future financial challenges. This allows greater financial flexibility, which in turn opens up many opportunities for future profitable investments. To put it simply, the more cash flow you have, the more opportunities. For this to happen, you need to understand your “Cash Flow Metric.”
To calculate this metric, you need to divide your assets and your liabilities. If you are unsure how to define your liabilities or assets, talk to your accountant to clear up the definitions. In an ideal world, your metric goal should be 2:1. You want twice as many assets as liabilities. Even though this is an attainable goal, it is challenging for many companies to reach. However, anything below 1:1 is a big red flag and you need to bring in more cash flow.
4. Accounts Receivable Aging
If you’re a business owner, you can’t afford to ignore this important finance metric. How long does it typically take for your customers to pay invoices? For example, if you offer a 30 day credit term, do your customers pay within those 30 days on a consistent basis?
From my own experience, customers don’t consistently pay within that 30 day slot. After 45 days would pass, I began to lose any profit that was in the invoice. Then after 65 days would go by, any chance of a profit was entirely gone because of the negative impact it had on my cash flow. These invoice time slots may not be applicable to your business, but it’s worth looking into your circumstances to determine these numbers for your company.
If these invoice time slots are applicable to you, consider offering your customers a discount. For example, I offered my customers a discount if they paid their invoice within 10 days. Many customers took advantage of the deal and helped my business by granting me the remaining 20 days to use that income to increase my profits. In the end, offering a discount was beneficial for me and my company.
5. Accounts Payable Aging
Another important financial metric is finding out the number of days it takes for you to meet your financial obligations for your business. Is it a week? A whole month? If you go through all the work to keep your cash flow, income, and accounts receivable up to date, it should be easy to keep your accounts payable up to date as well. You may even be able to take advantage of any prompt payment terms your suppliers offer you.
It is a wise and money efficient thing to pay your suppliers early if any discount applies. I know many businesses who save money by doing so. If you take a minute to analyze your income and expenses, that discount could have a large positive impact on your profits.
It is so crucial to stay up to date with your business credit obligations. It will help you with your borrowed capital and increase your opportunities to borrow. This can include your utility bill, credit relations with vendors, leases, and any other credit obligation that is unique to your business.
Throughout my many years of experience as a business owner, I’ve developed the previously mentioned top five metrics that you need to know if you are currently owning a business or looking to start one. When you stay on top of these five things, you will avoid wasting time and money. The road to success is not always an easy one, but it’s so much more enjoyable when you see the profits and growth in your company.
You may want to consider diving a little deeper into one of these metrics. For example, you can use income streams or particular classes of expenses that may make it clearer to understand. There’s no need to worry though. Your CPA or accountant will be able to have the knowledge on what metrics that will give you the most insight for your business. If you lack the understanding, don’t be afraid to ask questions! The more you and your CPA or accountant are on the same page, the better. There are terms and formulas that are still unfamiliar to me and I have to ask questions. Consequently, it helps me understand my business more when I take the time to ask for clarification.
In hindsight, I wish that I would have seen the greater value in strengthening my relationship with my accountant. I should have treated my association with my accountant as a consultative relationship rather than a transactional one. If I had known this sooner, along with these five important finance metrics, my business would have seen growth earlier on.