When you’re a small business owner, every minute matters. There’s a lot of hats to wear, balls to keep in the air, plates to keep spinning. In the area of financial management, you may feel as if you’re never doing enough or that you simply can’t keep up. That’s why it’s good to know the financial measures you need to track so that you can let the rest go.
After all, wouldn’t you like to do a little less so you can focus on your core business? Or, for that matter, get out on the golf course or catch your kid’s little league game. Once you’ve developed your list of financial measures, you can get into a good tracking pattern.
There’s another option, too. Outsourcing your CFO services can go a long way in freeing up your time and ensuring you’re focusing on all the right financial data.
More on that in a bit. For now, let’s dig into the list of core financial metrics:
Profit Margins: You saw this one coming, but maybe you are unsure how deep you need to analyze your profit margins. There are three basic ways you need to report your margins:
· Gross Profit, the balance after you subtract your production cost
· Net Profit, which measures gross profit less expenses, costs and taxes (also referred to as net income)
· Operating Profit, the revenue subtracted by your cost of goods sold (COGS), expenses, depreciation and amortization
Measuring your profit margins gives you a clear return on investment and allows you to report to investors how things are progressing.
Cash Flow: Your statement of cash flow is a key measure of business financial health. A positive cash flow is an indication that you are seeing growth in your liquid assets, which equips your business to pay down debt or reinvest, make a payment to shareholders, pay your expenses and enjoy a little extra buffer in the case of an unforeseen financial challenge. Cash flow is critical for keeping your operations going and fostering future growth.
Current Ratio: When you divide your current assets (which includes cash, cash equivalents, inventory, accounts receivable, prepaid liabilities and securities) by your current liabilities (which are debts due to be paid within 12 months), you have calculated your current ratio. This financial measure is useful when you need to demonstrate that your business can replay short-term debts. It is utilized when applying for a business loan or preparing for an IPO.
Debt-to-Equity Ratio: One of the most important financial measures shows how your business is financing itself using debt and equity. A lower ratio shows that your business is funded more heavily by owners than through debt. It also demonstrates the investment of owners in the business and its future stability.
Quick Ratio or Acid Test Ratio: This is an additional measure of liquidity that provides an indication of your ability to meet short-term obligations. It utilizes only your current assets that can be liquidated with ease, such as cash, accounts receivable and marketable securities. Generally, you are including assets that can be converted to cash in a 90-day window.
For liabilities, you will include your loan payments, taxes and payroll. The quick ratio tells you whether you have enough assets to cover current liabilities.
Accounts Receivable Turnover: When your customers pay their invoices quickly, you have more cash on hand. Even if your business is showing growth in sales and revenue, it’s important to show that customers are paying in a timely manner. Otherwise, you will struggle to pay your bills and repay loans.
You will measure your accounts receivable turnover through a ratio of average accounts receivable each month to net credit sales. Higher turnover ratios indicate an efficient process, while low turnover demonstrates a need to shorten the time between the sale and the invoice being paid.
Accounts Payable Days Outstanding: If you pay your suppliers too quickly in relation to how quickly your customers pay you, you’re going to experience issues with cash flow. Paying suppliers on time is key for maintaining positive relationships, but you may need to stretch payments within a reasonable time frame to free up cash.
Cost of Goods Sold (COGS): A portion of your gross revenue is claimed by costs, such as labor, materials and sales. This metric has a direct impact on your margin, so it is useful for making business decisions, such as negotiating with suppliers for lower costs or identifying a new source of materials.
Inventory Turnover: This metric tells you how many times in a particular accounting period your inventory was sold in completion. It indicates whether you are purchasing too much inventory relative to how quickly it sells.
Return on Equity: Your shareholders appreciate seeing this among your financial measures. It measures net profit over shareholder equity. It demonstrates how well your company is returning profit in exchange for equity investments.
Seasonality: Not every business owner will require this metric, but for those in an industry where there are significant high and low seasons, this measure helps you account for variables and get a clear picture of your financial stability and health.
You May Want to Consider Outsourcing
As you may have guessed, it’s not enough to simply produce this relatively long list of financial measures. You also need to know what to do with them, which results indicate that you may need to take action and how they each affect one another.
Analyzing these metrics for insights requires expertise in accounting and may take significant time.
Working with a fractional CFO services provider like The Power CFO provides a few key benefits:
· Accurate financial reporting, fueled by accounting and finance expertise
· Informed decision-making with the assistance of an experienced CFO
· Deep insights into how financial measures will impact your business in the future
· Access to an experienced expert when you want to apply for a loan, seek out investors or make another critical business decision
· Get additional help when you need it, scale back when you don’t
At The Power CFO, we provide the financial measures you need, as well as guidance and insight when it’s time to make a business decision. We help you drive growth with confidence based on solid financial metrics. Contact us to learn more about our services.
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