Paying attention to these numbers pays off
Keeping up with all of the day-to-day demands of operating a business can cause owners to lose sight of their company’s financial situation.
But it’s important to stay on top of key performance indicators (KPIs) to quickly assess how your business is doing so you can take corrective measures if necessary. Or capitalize on new opportunities.
It doesn’t take much time to check on these vital numbers. Be proactive with your company finances by considering these tips.
How liquid is your business?
It’s important to have enough cash on hand to cover short-term obligations. It’s nice to have extra cash available to take advantage of money-making opportunities as they arise – for example, you may come across a cash-starved vendor liquidating stock that you could buy and sell later.
A simple way of determining your company’s liquidity is to look at cash flow. Using your accounting software or financial records, review all cash receipts and disbursements over the last 90 days.
Are you able to meet all of your short-term payment obligations, such as paying employees, suppliers and overhead costs?
What is the monthly cash surplus or deficit?
Do you expect any significant changes to your cash flow position during the next 90 or 180 days? If so you may need to bring in more sales or secure credit with the bank.
Next, update a cash flow forecast using a spreadsheet or accounting software. Use this projection to identify any fixes you need to make to improve cash flow. Or, you may find surplus cash you could put to work in a short-term savings account.
Current Ratio is calculated by dividing your current assets (cash, inventory and receivables) by your current liabilities (employee costs, supplier payables and current portion of any long-term debt).
If your sales are booming but there never seems to be any money left after the bills are paid, your business may have profitability issues.
Monitoring profit margin rather than gross sales can help you figure out how much money your company is actually making.
Divide your net profits by your total revenue. For example, if your business brings in 275,000 in sales and has 36,000 remaining after expenses then your profit margin is about 13%. This means that for every rupees your company receives from customers, it keeps 13 paise. Any movement in this number may indicate that your business is becoming more or less profitable.
Net Profit Margin measures how much your company earns (usually after taxes) relative to its sales. Operating Profit Margin measures earnings before interest and taxes.
More numbers to watch
Other items worth checking during your financial review include overdue receivables, inventory, and borrowing costs.
Your company’s liquidity, profitability and other key financial ratios provide valuable insight into your business so you can take any necessary action. Schedule some time every month to review these critical numbers. Software makes it easy to track monthly, quarterly and annual financial performance so you can see how your business is progressing.