The typical business owner looks at two numbers on the income statement: the top line and the bottom line. He wants to know if the company has reached its revenue goals and how much profit is left to distribute or reinvest. While these are both essential metrics, they are not enough to successfully guide your business decisions. By adding these four steps to your financial review, you can easily monitor your company’s financial health.
1. Track Revenue Growth
Fundamental business financials include the income statement, balance sheet and cash flow statement. The income statement reports revenue and all the expenses incurred while generating that revenue. Tracking and analyzing revenue fluctuations by month and fiscal year will help illustrate trends over time and enable you to make informed projections for future income.
2. Manage Direct Costs
Direct costs are expenditures directly related to the goods or services provided. In a service organization, this would include labor attributable to a specific client, while in manufacturing, it would reflect the cost of raw materials used to produce goods. Gross margin, meaning revenue minus direct costs, is another critical metric because it shows you how much is left to cover overhead costs. Look at this number as a percentage of revenue, and watch for any unexpected increases so you can take appropriate action.
3. Control Overhead Expenses
Overhead expenses are costs attributable to the company as a whole, rather than to a particular customer or inventory item. This includes the cost of administrative staff, rent, utilities and other expenses that represent the cost of doing business. Overhead costs can creep up and eat into profits if you’re not careful. Compare these expenses month to month and year over year, and address any significant fluctuations.
4. Keep Cash Flowing
Another essential component of your business financials is the balance sheet. There you will learn, among other things, your cash balances, how much you owe others, and the amount customers owe you. The cash flow statement will show you where your money came from and where it went over a given period. The desired result is positive cash flow, meaning you collected more than you spent. The accounts receivable ledger is another useful tool as it gives you a detailed breakdown of which customers owe you money and identifies any past-due balances that need collecting.
While financial statements may not be as much fun to read as the latest thriller, they can provide vital information about your business and raise red flags while there is still time to take action. Keeping an eye on these essential checkpoints can help your business thrive.