Financials & Their Importance to Small Business Success
By Debbie Gregory.
By Debbie Gregory.
One of the most important elements to a successful small business is strong financial health. Here are some metrics that every entrepreneur should make sure they consistently focus on:
The Break-Even Point – This is the the dollar amount you need to get to in a given period, generally monthly or quarterly. This amount needs to allow for the company to cover its own costs and sustain itself. Also, take into consideration even if it is not making a profit during a slow time, you will still have outgoing costs. This is sometimes called the margin of safety.
Operating Cash Flow – This lets you know how much cash your business brings in from its normal operations. It is common for businesses just starting out that they may operate at a loss in the beginning. Once established, this number should be positive.
Net Income Ratio/Profit Margin – Your profit, the money left over after operating expenses are subtracted from revenue. This is a very important metric. You need to make sure your business still makes money overall after you pay your expenses. A business just starting out, or one experiencing a bit of a slowdown may have a bottom line in the red at some points, but you should always set your sights on growing your profit margins. If you are losing money, it’s time to look at ways you can trim expenses or reconfigure your operations.
Working Capital – This number is determined by taking your current assets (cash, accounts receivables, short-term investments) and subtracting your current liabilities (liabilities due within the next 12 months).
Gross Margins – The gross margin is calculated as a company’s total sales revenue, minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and then enjoy as profits. Tracking margins is important for growing companies, since increased volumes should improve efficiency and lower the cost per unit (increase the margin).
Veteran and Military Business Owners Association, VAMBOA,
