One of the biggest obstacles in business is predicting cash flow and influencing the future of your company. Business owners may become paralyzed when they review their financials. Understanding your numbers will help you be proactive about your company’s future and confident in the decisions you make. Let’s take a look at some common questions business owners may have regarding their financials and learn the top ways to unleash the power of your financials!
Is there a better way to manage cash flow?
Trying to run a business without cash flow management is like trying to paddle a boat without an oar. Even if you succeed, it will be an upstream exercise guaranteed to wear you out. The three key elements of your cash flow analysis include:
- Accounts receivable: What customers and clients owe you.
- Accounts payable: What you owe your vendors.
- Shortfalls: (You hope not to have these, but they do happen.) Determine your break-even sales and use your breakeven point as a benchmark.
You must effectively manage all three if you want to navigate your business to success. Of course, the best direction to paddle a canoe is with the current. You’ll go faster and won’t wear yourself out. By the same token, your business will be healthier if you manage your cash flow toward the profit line.
Are my products and services profitable?
One important number that business owners tend to overlook is their Gross Profit (GP) Margin. The gross profit margin is your sales, minus cost of goods sold. The amount remaining is the profit on sales, after the costs directly related to the sale of the service or item are deducted. Some notes about gross profit margin:
- The greater the GP margin the more profitable the company is before fixed costs (overhead)
- Helps the business owner to determine if they are pricing their services correctly and controlling their cost of goods sold (labor and materials)
- Increasing sales does not always improve cash flow
- Set a GP margin target and monitor your results each month — track your GP margin over time to ensure it does not deteriorate and lead to cash flow problems — being proactive and not reactive
- GP margin helps the owner to determine their break-even sales by dividing the total overhead expenses by their GP %
How do I know how my business is performing?
Have you ever heard the adage “Garbage in, garbage out”? Well, it is true! In order to have confidence in your financials, you have to make sure you have captured all of your revenue and all of your expenses in order to see the full story. One way you do this is reconciling your cash and liabilities.
Reviewing your bank balance online DOES NOT give you a full and accurate picture of your financials! If you are using your bank balance to determine your cash flow you will run into complications. Your bank balance does not include activity that has not cleared. Reconciling your cash on a daily basis is extremely powerful. If you are reconciling all of your accounts on a daily basis, you will have a better handle on your key metrics. Think about the power of daily reconciliation for a minute. If everything is updated every day, that means you have real-time access to all of your key metrics. If you knew your real cash balance daily, instead of just your bank balance, would that be valuable?
As important as it is to know your cash balance, it is equally important to have an accurate budget. I call it “creating a financial road map.” It is important to predict the future of your company. Big decisions are difficult to make, and once you commit to a decision it is difficult to change course.
One of the most important year-end tasks for most businesses is to work on next year’s budget. Often though, this process is misunderstood. It is not only a financial exercise for the future, but also a way for a business to evaluate their prior performance. As the year draws to a close it is important to take a look at how far you have come and what you have learned along the way. It is important to review your accomplishments. You should celebrate the areas in which you improved and review how they impacted your business. Doing this will help your determine your goals and set your path…however in order to evaluate your performance you must understand the story behind your financials.
How can my business financials help me make better decisions?
Have you heard the expression “Numbers don’t lie?” It’s true, they tell your story — don’t be afraid to pay attention. Knowledge is power. In order to know your cash flow you have to know your numbers. Before you can determine your current financial position and set realistic goals you must understand your current financial situation. You also need tools to help track your progress. Timely and accurate financials are the first step to gaining control. They help you to identify potential pitfalls and help you to make educated and informed decisions. Financials also help you to set goals so that you can project your cash flow, allowing you to be proactive with your finances rather than only reacting to what already took place.
It is important to understand the numbers behind your business. They tell you a story. They show trends and performance. They can help you to make proactive decisions for the future, instead of reacting to the past.
What financials are important and how do they apply to my business?
Reading your financials and accounting reports is like reading a novel…every chapter tells a part of the story! It is important to not only review your financials but you also need to know how to read them. How does your company stack up against competitors? How has your revenue and expenses changed over time? Ways to review your financials include:
- Profit & Loss Summary Prior Year Comparison: Most business owners rely on the Profit & Loss Summary report, but comparing your results to last year can provide quick insight into whether your revenue is growing — as well as how fast expenses are rising.
- Balance Sheet Prior Year and Prior Month Comparison: As with your income statement, it’s important to compare where certain balances stand now versus last year: Cash, Accounts Receivable, Inventory, Accounts Payable, Other Liabilities, such as lines of credit or short-term loans and review the changes.
- Budget to Actual: Great report to track your progress by comparing your actuals versus what you budgeted. It helps you to manage your cash month to month.
- Statement of Cash Flows: The Profit & Loss reports enable you to see what you earned, while Balance Sheet report helps you determine what you have — as well as what you owe. However, neither report necessarily provides a clear picture of where cash is coming from, or going to. For that, you should look to the Statement of Cash Flows report. This report allows you to see:
- How much cash you’ve taken in from sales and spent on expenses
- Cash inflows or outflows from borrowing, repayment, or investing activities. In short, this report shows you exactly what caused your bank balance to increase or decrease during a given report period.
- Profit by Customer and Product: What are your revenue generators and what do you need to more closely track?
We Can Help
Accounting is known as the language of business. Understanding your financials unleashes the power to make better decisions and drive your business towards success. Contact Signature Analytics to schedule a free business process review and learn how we can assist with your financial analysis and outsourced accounting solutions!