As a business consultant, I get to help people grow their businesses. The first meeting I have with clients typically starts with them telling me about their business. I watch them light up as they talk about their mission and vision and how far they have come. When I shift the conversation over to their financials, that energy and excitement often fades. For many, it is not that their financials are in trouble, but rather, they don’t know how they are doing financially. They run their business based off of how much cash is in the bank at a given moment and leave it at that.
While each business will have some important figures unique to their industry, there are a few that every business owner should be monitoring.
Revenue: This one might be obvious, but I feel it should be addressed because many business owners who measure revenue aren’t analyzing it. Business owners should not only know what their revenue looks like for the given month, but they should know what it is cumulative for the year. They should be able to look back and compare their current figures with where they were at the same time a year ago. If it differs year over year, why? What has changed? In addition, many business owners know which months are “slow” month, but have a difficult time quantifying “slow.” Does it mean sales are down 10 percent from normal? Or does it mean 50 percent? Knowing what is normal allows business owners to plan and to identify when there is a problem.
Payroll expense: This is one of the most common expenses to quickly get out of hand. It is often a business’s largest expense, so any change is going to hit the bottom line hard. Business owners should monitor salaries to see how they have been trending over the past several months. If an increase in this expense is happening, ask why. Are employees working overtime? If so, is that overtime truly necessary? If it is necessary, is it time to hire an additional employee?
Gross margin: Gross margin is the percent of revenue that is left over after direct costs have been paid. In simplest terms, if a retailer sold a product for $10 and that item cost the retailer $6, the gross margin is 40 percent ($10-$6=$4, $4/$10=40%). If sales are going up, but the net profit is going down, look at the gross margin first. Often when this occurs, it is a result of a business discounting or putting products on sale. Their sales may go up, but they are not making as much from the sale. If a company with a normal gross margin of 30 percent offers a 20 percent discount, they will need 40 percent more in sales just to make up for the discount.
Accounts receivable: If a business is profitable, but still finds itself short on cash, accounts receivable is one of the first places to look. When a business reviews accounts receivable, most look at who owes them and how much they owe. This is a great start as it can help find some of their cash shortfall. But monitoring accounts receivable goes beyond that. It can give insight on how well they are extending credit. On average, how long does it take your business to collect payment? Is that number growing? If it is, why? Do credit terms need to be re-examined?
This list is not meant to be all inclusive. Additional figures will be important to a business depending on the industry they are in. Of course, you can’t monitor any of these if you aren’t tracking them. For small businesses, we recommend using bookkeeping software such as Quickbooks Online. For businesses that are not currently using Qucikbooks Online but are looking to start, or for businesses using Quickbooks Online but not using it efficiently, the UGA SBDC offers several Quickbook classes at multiple locations across the state.
(Source: Valerie Cote, Area Director, UGA SBDC at Georgia Southern University)
