Using your financial statements to measure your business is one way to make sure that you and your business is moving in the right direction. In order to accomplish this you need a few things.
Financial Statements (both accurate and timely)
Consistency – In order to track the direction of the business, consistency is key. Knowing your ratios only once in a while will not show a true and accurate picture of your business and can lead to bad business decisions.
Picking the right KPI’s (Key performance Indicators) or ratios. Some ratios are a better fit for some businesses more so than others.
The Debt to Equity Ratio is a good ratio to track the businesses financial leverage. It shows as a percent how well the business is at managing it’s debt to make a profit.
The higher the ratio the more reliant the business is on debt to turn a profit.
Example: Company A – Total Liabilities $80,000, Total Equity $120,000
$80,000 / $120,000 = .6666 or 66.66%
Company B – Total Liabilities $150,000, Total Equity $80,000
$150,000 / $80,000 = 1.875 or 187.5%
Company B is higher in debt and more reliant on external loans to make a profit. However, only showing this at one point in time does not show which direction the company is going in. Company A could have a lower ratio right now but shown over time could be increasing and Company B shown over time could be decreasing. Calculating this ratio over time shows the true nature of the ratio and shows if it is improving or not.
Your business needs a budget, yes, but do you have one for you? Having a personal financial plan is just as important as having a business financial plan. This is for a few reasons. One is if you, as the business owner, is having financial troubles it will show through in your business. It will add stress to the workplace environment. It will cloud business decisions and lead to making bad business decisions.
Steps to help create a budget for you personally:
Take a look at each area of your spending. Use your current spending patterns as an initial budget. I say this within reason. If your spending $3k a month on recreational activities you may want to take a look up front and see if you should cut back.
Know your debt and come up with a plan to reduce and eliminate. Try starting with your smallest debt and get that one paid off first. Sometimes a victory is just the motivation you need to get pumped to get rid of excess debt!
Build and maintain an emergency fund. Having at least 3 months living expenses in a savings account reduces anxiety should a major expense come your way.
Open or start contributing to an IRA. Whether or not it’s a Roth IRA or a traditional IRA.
If you have a child start contributing to a Section 529 plan to help prepare for future educational costs.
Have a set of funds that you can invest. Make sure you keep track of the ROI on this. If you have a low ROI or a negative ROI readjust.
Take the time to look at not only your businesses financial plan but your personal one too.
I took this photo one morning as I was strolling around the grounds of a resort in Key West sipping on my morning coffee. Taking this photo gave me the idea for this blog post.
The question that I thought of as the sun was rising above the ocean was “is rest and relaxation important for research and development?”
Taking a vacation and doing things of solitude can help you get clarity on areas you are working on. For me the clarity moment came when I was along, with no distractions in the silence of the morning hours before the world gets busy. Business owners always have a few ideas rolling around in their head that have to do with where and how they want to take their business. This “quiet time” is the perfect time to put things in perspective and layout a plan of action.
The moral of the story is that it is beneficial to slow down, put things in perspective, analyze options, and lay out a course of action. Of course, the latter part is for when you get done with vacation.
A chart of accounts is a set of accounts used to make up the your businesses financial statements. Having a proper setup of chart of accounts is instrumental to having financial statements that you can use as a tool to manage your business.
One of the most common setups in the corporate world is what is called a Multi-Step Format. The Multi-Step Format for an income statement looks like the setup below. You start by organizing your sales by sales categories and sub categories. Then you have your Cost of Goods (COGS) or Cost of Sales (COS). These are the expenses directly associated with the production of your sales categories. Subtract the two and that gives you your Gross Income.
Next you have your SG&A expenses or your operating expenses. These are all the expenses that your business incurs that are necessary to running the business as opposed to COGS that are direct costs associated with creating a product or service. Operating expenses can be broken out by department. Even if you do not have separate departments in your business you can still break out the costs of those “departments” As in the illustration below, under expenses, I have the Operating expenses as a category, Payroll as a category, Marketing as category, and Other Income / Expenses as a category.
Subtract your Gross Profit or Gross Income from your Operating expenses and you get your Net Income (Pre-Tax) below that you can calculate your tax liability to get your net income after tax. And below that you can have a calculation of your EBITDA. This stands for Earnings Before Interest Tax Depreciation and Amortization. EBITDA is a number that analyst’s use to gauge the performance of a company. It takes net income and ignores non-cash items (Depreciation & Amortization) and items that are not produced by the business (Interest & Tax).
If you have any questions or would like help setting up a chart of accounts for your business feel free to schedule a free consultation here http://bit.ly/2frNusl or email me at firstname.lastname@example.org
There is a saying in business that “Cash is King”. Part of running a successful business is having good cash management skills. Understanding and managing the cash flow of your business is a vital skill that not only medium and large businesses practice but small businesses practice alike.
It is OK for cash flow to be negative from time to time. However, if it is negative over time it will eat up your cash reserves. And just like in personal finances when cash reverses are low over an extended period of time it puts added stress on the business.
When analyzing cash flow there are a few areas you want to focus on. The first is accounts receivable. The second is accounts payable.
Accounts Receivable (A/R)
Staying on top of accounts receivable and collecting what is due will help increase cash flow. Start with running an A/R aging report and drill down on the detail of what is over 90 days past due and even 60-90 days past due. Sending out collection letters or even making a phone call to collect what is owed will help reduce A/R and increase cash flow.
Accounts Payable (A/P)
Now I know what you’re thinking. ‘Accounts Payable?, isn’t that just going to reduce my cash flow?’ Yes and No. Properly managing accounts payable will two fold when it comes to cash flow. The first reason, analyzing A/P tells you exactly how much you’re paying and what you are paying for. This can lead to questioning certain expenses. Questioning if you can get a better deal for the same item or service or even if you need the expense at all. Reducing expenses will increase cash flow. The second reason is that having proper A/P management will lead to better vendor relationships. Having better vendor relationships can lead to better payment terms. i.e. if you are paying due upon receipt and you have a good relationship you can ask for net 15, or if you are on net 15 terms you can ask for net 30 etc…
The bottom line is understanding your numbers and using your numbers to run and guide your business is a best practice to ensure that your business can continue as a going concern. If you find yourself struggling with cash flow or just the cash flow management process feel free to schedule a free consultation at http://bit.ly/2frNusl or shoot me an email at email@example.com
I woke up this morning with a reminder to file my annual report with the state of Florida. This gave me an idea for a post. I though I would share a best practice on the benefits of setting recurring events in gmail for items that you do not do on a regular basis.
Each year as a business owner in Florida I have to file my annual file with the state. This is due between Jan 1st and May 1st each year. A $400 non-negotiable late fee is imposed if you miss filling. I hate to see other businesses get unnecessary charges.
So, a best business practice for small businesses is to get a yearly recurring calendar event to pop up and remind you that the filing is due. I do mine in Gmail but any calendar will work.
So for all the Florida business out there and any state out there. This blog post is a reminder to file your annual report. This post is also to share a best practice to set reminders in your email for recurring events that do not happen regularly.
Of course, Got Questions? Send an email, call or set an appointment. My calendar is linked on my website.
A series of videos are soon to come on how you can use your balance to help understand your business. I will go over a few ratios and things you can look at to help you get a better understanding of your business. The balance sheet is just one of a few financial tools you can use to make to help you make better decisions when it comes to your business.
We will not only go over a few ratios but we will go over what to look at over time so that you can tell if you business is on the right track and growing or if there is cause for concern. Did you know that most problems can be detected before they are a serious problem. If you analyze your balance sheet often you can catch these issues before they become problems.