In order to make informed business decisions, such as finding financing, you need to be able to understand your financial performance, especially since the COVID-19 pandemic has changed the way many small businesses operate.
However, navigating your financial metrics doesn’t mean you have to sit on a calculator.
When you use technology, like accounting software, you can automate data processing and spend your time examining the actual information provided by the data, says Ben Richmond, public accountant and country manager in the United States at Xero. , a cloud-based accounting software platform provider. . With the right tools, you can take more control over your business and gain more confidence, he says.
Here are four essential metrics to understand in managing your business finances.
1. Cash flow
One of the most important indicators of financial performance is cash flow, or the amount of money entering and leaving your business. Richmond uses the analogy of a company like an amazing Ferrari, and for cash flow, gasoline. “If you don’t have gasoline, the Ferrari is nothing more than an ornament sitting in the garage,” he says.
Most bookkeeping and accounting software platforms allow you to automatically generate a cash flow statement. Understanding how much money you have on hand is the first step, says Richmond.
Then you can create a cash flow forecast and take action on that information. For example, you can determine if you need to tighten spending to make sure you’re well funded. On the other hand, if you are growing and have a cash surplus, you can decide how best to take advantage of this opportunity.
Profit is the overall goal of most businesses. The income statement, which shows your profit (or loss) over a period of time, is one of the most useful reports available to you.
What percentage of revenue is generated by your top three customers or products? How many employees are needed to run the operations?
These are numbers small business owners need to know, Marko Mijuskovic said via email. Mijuskovic is a Certified Exit Planner and Senior Partner at WestPac Wealth Partners, a wealth management firm headquartered in San Diego.
Like the cash flow statement, you can automatically generate an income statement using accounting software. Then you can identify opportunities to cut unnecessary spending and prioritize your top performing products and services. in order to maximize profit.
3. Accounts payable
The common saying is true: you have to spend money to make money. And by actively monitoring your accounts payable – the money you owe vendors or vendors for purchases made on credit – you can determine how much money you’ll need and when you need it.
You’ll want to make sure you have enough cash to run your business and pay your vendors on time. One of the main reasons businesses fail, said Sallie Mullins Thompson, a chartered accountant who works with small owners, via email. companies.
Making on-time (or even early) payments allows you to maintain good relationships with your suppliers, take advantage of possible payment discounts, and create trade credit, which is essential if you are looking for financing in the future.
Accounting software can help you streamline your accounts payable at a basic, yet dedicated level accounts payable software can automate the process even further.
4. Accounts receivable
Which invoices are unpaid? How long does it take your customers to pay their bills? How much of your money is typically tied up in unpaid bills? These questions relate to all of your accounts receivable, the money customers owe your business for goods or services that have already been delivered.
Tracking your accounts receivable has similar benefits to tracking your accounts payable: by determining how long it takes your customers to pay their invoices and making sure they pay on time, you can do better. manage your cash flow and avoid losing profit.
Accounts Receivable Software can streamline this process, as well as provide tools to help improve communication with your customers. These platforms can also consolidate all of your accounts receivable data in one place so that you can gather additional information about your business performance.
Understanding your accounts payable and receivable is more than looking at your business strictly on a cash basis – cash out, cash out – says Richmond. Tracking these movements allows you to anticipate and get a complete picture of the business, he says.
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Randa Kriss writes for NerdWallet. Email: [email protected]
The article Know These 4 Business Financial Metrics To Track Performance originally appeared on NerdWallet.