The Most Important Financial Metrics Every Small Business Owner Should Track

What are the most critical financial metrics of business health? For most small business owners, this is an important question, but rarely can they define the metrics of success. For many business owners, the only metric they pay attention to is the amount of money in the bank. This is a reasonable response, as most business owners are trained in anything but finance. So, they look at a business bank account as their personal one. If there is $50,000 in the bank, they might feel very comfortable with their business and success. However, if their monthly expenses total $100,000, that bank account might look less secure, and their firm might be only a few weeks away from going out of business. 

As a business owner, there are countless metrics that you can analyze to determine the health and longevity of your company. From a financial perspective, the essential metrics would likely contain- Cash Flow, Bank Account Trends, Accounts Receivable, and Recurring Expenses such as subscriptions. Yes, profits, revenues, and total expenses are always the top line of financial data to analyze. But the previous listing is some of the deep data points that can give you more insight into where your business is heading and the depth of its overall health. 

Cash Flow

Cash flow is the process of analyzing the movement of money within an organization. Yes, it is an oversimplified explanation. Still, all cash flow does is look at the movement of money from when it is booked as revenue to either paying off expenses or adding to company savings. However, looking at cash flow can help a company determine sales health, financial management, and potential future profits. These are some ways cash flow can help you as a small business owner.

Cash flow can help analyze a business's profits by determining where the cash flow originates. For most small businesses, the most noticed cash flow will come from sales. Every sale will increase a company's revenues, and cash flow will start at this point. But, if you are very nimble in managing your expenses and revenues, you can derive cash flow from both sales and investing activities. Most companies' revenues generated by investments will likely be lower than sales. But, if you have large irregular payments, say from significant project revenues, your assets might be as productive to profitability as your sales. For some companies that operate like this, most or possibly all their profits come from managing their money rather than sales. So as an owner, you can look at the sourcing of cash flow, how it moves through the company and towards expenses or savings, and determine the most optimal path to managing your funds. Cash flow analysis at this level has plenty of nuances, but it can be very eye-opening to see if you optimize every dollar that flows into the company.

Take a look at here for more on cash flow and management https://www.bankofamerica.com/smallbusiness/resources/post/cash-flow-management-basics-for-small-businesses/

Bank Balance Trends

Bank balances are the number one method that most owners use to evaluate profitability. The question is, how much money do I have in the bank? A more effective method is to examine how bank balances have changed over time. Why? A bank balance is only one moment in time. It is the total deposits at X time on X day. If you pay all your bills the next day, you will see that the balance changes drastically. Think of an example from the government. On tax day, the government bank account will overflow with receipts from tax payments. But, six months later, the government bank account might be much lower. This is true for a business too. So, a more effective analysis is to see how the balances have changed over time. This will give you more insight by asking other questions- Are your profits growing? Are your expenses getting out of hand? If current trends continue, should you expect that you can add more staff, or should you look at reducing staff? That is how looking at bank account changes can help drive the company forward.

Dues or Subscriptions

Discussing financial management in business would only be completed by looking at dues or subscriptions. From an expense management analysis, one of the most overlooked expenses that can add up is those "little" dues or subscription fees we all get hooked into. Even for personal finance management, this is one of the biggest traps for everyone. You need a small monthly fee for this software subscription or access to this information site. The problem is more than just that, a tiny subscription; the problem is that you have 10 of those. Even worse is when you forget you have the subscription, as you don't use that service anymore, and they still keep charging for it. For sound financial management of these types of expenses, either set aside some time every few months to review these reoccurring expenses, or you could get a software system that will tell you how much you use a service and check to see if you still need the service. If you can save on five of these expenses each year, depending on the monthly fee, you might save a few thousand dollars over a year. 

Take a look here for more ideas on how to manage your subscriptions https://www.fool.com/the-ascent/small-business/accounting/articles/business-expense-categories/

Accounts Receivable

Accounts receivable are one of the most significant headaches for business owners or accountants. Indeed, staying on top of payments owed to your business for products or services rendered on credit can be a full-time job for one person. This is especially true if your business or industry is in a field where almost all business is based on credit and timed payments. Yes, the account receivable is an asset of the company. But when one looks at it, it is just a promise to pay, not a guaranteed payment. From a cash flow angle, there is no cash payment, so there is no cash to track. Therefore, while the account receivable is an asset, it never counts as cash in the company, which is a problem for many businesses.

The only way to manage accounts receivable is to turn it into cash flow as soon as possible. You can use several potential techniques to do this, which can then translate into positive cash flow. For example, almost all businesses use a "net 30" payment system, requiring all invoices to be paid within 30 days. The problem here is that there might be multiple invoices to the same customer over the course of a month; the invoices may need to be clarified. Even worse, if your customer needs help with financial issues, they might pay lower invoices in this period while pushing off larger amounts. 

You can offer clients a small discount of a few percent if the bill is paid immediately. Businesses can "factor out" these invoices to firms that buy A/Rs, which would act like the discount you offer clients if paid immediately. You can offer a small discount for a partial payment, or even offer an additional service for payments that are made in full or partial payments before the net 30 date. In the end, as an owner, you can be proactive in handling A/Rs to quickly turn these from assets into cash, which can quickly improve your financials and the metrics of the company. 

For more information on how to manage you're A/R, check out https://www.bankofamerica.com/smallbusiness/resources/post/your-small-business-guide-to-managing-receivables/

Conclusion

As you can see, tracking and understanding financial metrics is much more than simply knowing how much you have in the company bank account. Understanding where and how cash flows into the company coffers can help optimize your revenue generations. From that point, looking at how the company manages expenses, especially reoccurring expenses or managing accounts receivable, can help keep the company developing sound accounting practices. Financial metrics are much more nuanced and important than simply looking at a bank balance at one moment. As a business owner, you would be well advised to understand these metrics to avoid any mistakes that affect your cash balance. We at Powell Finance Group are always happy to sit down with you and build a solid understanding of your company's financial metrics; together, we can help set your company on a sound financial path.