In order to grow your business, you need to understand how you’re faring. Financial numbers provide you with an accurate picture of your performance, but as a busy business owner it’s unlikely that you have the time or the inclination to spend hours pouring over complex numbers. However, ignoring your financial numbers is likely to lead you towards failure. It’s prudent to create a list of key performance indicators (KPIs) to focus on so that you can keep an eye on what really matters. This will then allow you to make informed decisions about the financial health of your business and measure your progress over time.
Profit and Loss Statement
It’s essential that you understand your profit and loss (P&L) report because it tells you whether you are making or losing money, and how much. You need to pay close attention to your P&L report and review it every month so that you get a good idea of how your status is changing over time. Keeping a close eye on these numbers allows you to identify areas where you can cut costs, understand seasonal patterns and know when to raise your prices.
It’s vital that you understand how much you are spending each month. If you don’t know how much you’re spending it becomes impossible to calculate profit and loss. Furthermore, you need to be aware of your spending so that you don’t blow your budget. You should use your accounting software to regularly create expense reports to review and compare against one another. This will help you to identify areas where you can reduce spending and ensure that your expenses are not growing faster than your revenue – although this is acceptable in the short term when preparing for growth, for example by hiring new employees or buying new equipment.
Accounts receivable refers to the money that you are owed in unpaid invoices. If you have a lot of money tied up in accounts receivable then you’re likely to run into cash flow problems, even if you’re operating at a profit. Keep a close eye on accounts receivable by using your accounting software to automate invoices, as this will help you to understand who owes what. Being aware of your accounts receivable allows you to differentiate between cash flow and profit, take action to chase up payments and make informed decisions about when to spend and when to hold back.
Profit Per Client
Some clients generate more profit than others. Your most lucrative clients aren’t necessarily the ones who spend the most, and it pays to know who actually makes you the most money. This will allow you to focus on attracting profitable clients who will earn you more money in less time and thus optimise your business growth.
Calculate profitability per client by taking the total fees received and subtracting the expenses involved. Then, divide this number by the hours that you spent on the work to calculate the hourly wage per client. You may be surprised at just how much this can vary!
Managing cash flow can be a tricky balancing act. It’s important to produce cash flow statements regularly so that you understand how much is coming in and going out of your business, and how much you are left with. Remember that cash flow and profitability are separate entities. It’s possible to be in profit but run out of cash because your money is tied up in assets and unpaid invoices.
You should create and review cash flow statements regularly and track how your situation is changing. It’s important to stay on top of your cash flow so that you know when you are able to make investments without running out of available funds.
Item sales reports create a clear picture of how profitable each of your products or services are. For example, one product may generate a lot of sales but a minimal amount of profit. This is actionable data that indicates which products or services you should be focusing on, and which to discontinue.
Like it or not, numbers don’t lie. As a small business owner, it’s vital that you stay on top of your financial numbers so that you can assess the health of your company and take action accordingly. You need to review and analyse your numbers regularly to understand how you are performing and give your business the best chance of success.
Did you know we’ve also got a free downloadable eBook dedicated to the most common profit draining mistakes made by small businesses. Check it out here.
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