Introduction
If you run a small business, there’s a lot to keep track of. Businesses of any size need to consistently evaluate their financial performance in order to keep their place open and running. While to the average eye, a successful business is simply one that stays open and sells products. Unfortunately, it just isn’t that simple. There are many ways to track and measure your business’s financial stability, with some being more important than others. While profits are essential, they don’t mean much when your business is spending more than it’s bringing in. If you’re wondering how to measure your business’s financial success, here are a few areas you should be tracking.
You have a positive net profit
The first measure of a successful business is a positive net profit. Net profit means after calculating your business’s expenses, you’re still “in the black” and are turning a monthly or yearly profit. Profit allows your business to continue running.
To calculate your net profit, gather your expenses for a total number. Then, subtract your total expenses from your total profits. If you return with a positive number, you have a positive net profit, and your business is bringing in more money than it’s spending. You can find this calculation on your business’s income statement.
You want to check this number at least quarterly, if not monthly so that you are keeping a careful eye on the financial health of your business and can help you determine problem areas that are costing your business lots of money.
Your expenses are flat
When your expenses are flat, you are spending the same amount of money month over month. It’s always good when your business’s expenses aren’t growing because it’s much easier to plan around if you know your costs each month.
Standard business expenses include payroll, cost of goods sold, product manufacturing and development, shipping, materials, monthly payments on debt, and rent for your business equipment and space.
You can ensure your business’s expenses stay flat by negotiating fixed interest rates on all of your loans, paying your employees a fixed rate, and tracking any volatile expenses.
Cash balance is growing
Cash balance means the cash your business has on hand that isn’t reserved for anything within your business, just liquidity. Your business needs to have liquidity because it’s a significant indicator of financial stability, specifically, your business’s ability to weather unforeseen storms.
For example, recently the consumer price index has shown historic highs due to inflation. This has caused the costs of goods and materials, such as meat and lumber to increase by 20% and 400% respectively. If you found yourself running a business in either of those industries, you would appreciate having a large amount of liquid cash on hand to keep your business afloat.
Low debt ratios
A low debt ratio means you have a low debt-to-asset or equity ratio. Ensuring these don’t go above a certain percentage based on your industry is another key to running a successful business. Having a high debt-to-asset ratio is bad because you run the risk of insolvency, which is certainly not a good thing for your business. A low debt ratio also makes your business more attractive to future potential creditors following the same logic as credit scores for individuals applying for additional credit or a loan.
A low-debt ratio offers peace of mind knowing that your business is running smoothly and keeping up with any debts or hard money loans you may have gotten along the way. Too much debt means your business is financially unstable and potentially insolvent, meaning more debt than equity assets. In the event your creditors want their loans paid off, you and your business would be in trouble.
High inventory turnover
When evaluating your business’s success, you want to look at your operational efficiency and practice management to see if there are any problem areas with how your business is running. Managing your production pipeline is yet another key to running a successful business. This includes finding bottlenecks in your production line that are hemorrhaging the efficiency of your day-to-day operations. These vary wildly depending on your industry, but the problem is universal.
If you’re not skilled in operations management, consider bringing on an outside consultant who can diagnose any efficiencies you may be unaware of in your business. Your inventory turnover metric shows how much inventory your business has sold or replaced in a given period. This metric helps you get an overall picture of your business’s finances and allows you to make more informed decisions about your manufacturing process, pricing, marketing, and how much inventory to purchase.
You have both loyal and new customers
Working with a new customer costs your business more than a repeat customer. Despite new customers costing more, you need them to be able to build a pool of loyal customers. Having both new and loyal, repeat customers demonstrates your business’s multiple streams of revenue and allows you to have options for profits.
Repeat customers on average bring in more referral traffic by 50% over new customers showing that harnessing loyal relationships with customers pays off nicely. Having a mix of new and existing customers can help increase your business’s revenue. Generally, repeat customers also tend to spend more money while also costing less to market to when compared to a customer who’s never shopped with you before. Customer retention is extremely important to your financial success, so your ability to turn new customers into repeat customers is a good indicator of your business’s financial health.
Financial health is wealth for your business
There are many ways to see if your business is financially performing. While we’ve named a few, these aren’t solely responsible for the financial health of your business. Instead, your business’s financial success depends on various factors, with some being more influential than others. The important thing to remember is to stay consistent with your different financial responsibilities, so you can effectively plan for the future of your business and ensure you stay afloat no matter what’s thrown your way.
