This might be the busiest time of year for business owners. You have deadlines and holiday parties to balance, but we suggest also making time to analyze your company’s financial well-being.
Let’s start with the basics. How do you measure the financial health of your business? Do you rely on the balance sheet or cash flow statement? Perhaps your measure of financial well-being is doing the same or better than last year or hitting your sales targets. Whatever your answer, you want your business to succeed and be profitable. Below are four tips to help you organize your business financials and position your company for growth in 2019.
Keep Quality Accounting Records
Did you know that only 20 percent of small business owners are using accounting software? Yes, it might seem expensive or complicated, but the investment is worth it. Business owners leave themselves open to calculation mistakes, missed payments, and even fraud without the right kind of software. As long as you commit to keeping it up-to-date, Quickbooks or an alternative like Xero can help you stay organized and accurate.
2. Look at The Numbers
Now that you have firmed up your accounting records, it’s time to look at the numbers. While your controller or accountant can provide insight, you should have firsthand knowledge of how your business is performing. We suggest working out a few common financial ratios to help you compare your business to past performance and to your competitors.
- Liquidity measures your ability to pay off short-term debts. It includes the current ratio (assets divided by liabilities) and the quick ratio (assets minus inventory divided by liabilities). For example, if you have $50,000 in assets and $25,000 in liabilities, your current ratio would be a sound 2:1. Using the same example but accounting for $25,000 of inventory, your quick ratio would be 1:1.
- Solvency is your total liabilities. The debt-equity ratio and debt-assets ratio are key to lenders and potential investors.
- Profitability (gross profit divided by total sales) evaluates your ability to produce income. Trends are especially important here.
- Inventory is connected to cash flow. To keep it at the right level, find out how long it takes to convert inventory to a sale. If you can reduce the number of days your product spends as inventory, you can increase your cash flow.
3. Identify Growth Opportunities
Where do you want to see improvement? Where do you want your business to be in five years? Ten years? You may want to bring in your key advisors at this point–if you haven’t consulted with them already. Maybe you would like to trim expenses after calculating your profitability ratio or find a way to reduce inventory while maintaining excellent customer service. Whatever your objectives, your plan should include measurable outcomes.
4. Monitor Performance
Revisit your income statement monthly, quarterly, and annually to check for progress. Is your business plan working? Are you retaining and attracting customers? Is your cash flow healthy? Your financial advisor can help answer these questions and work with you to develop solutions.
Getting a better understanding your financials can have a positive impact on day to day decisions and the bottom line. While it may take extra time at this especially busy time of year, your business will be better off for it. We can help you start the new year off right. Contact our team with questions. We wish you a happy, healthy, and prosperous new year.