The health of a small business revolves around it's finances. Good business owners know how to be good financial doctors. When managing your own company's finances, you tend to have a pretty good understanding of where your 'health level' is at all times. If someone is doing your business accounting, be sure to take time every month (if not week) to check over some key indicators. What to monitor the most closely varies from company to company, but a few good baselines to visit often and keep an eye on are outlined below.
- Misfinancing. Check that your long term and short term debts are still serving your purposes, and if they aren't or you're not sure, it might be time to schedule an appointment with your banker. Aim to pay off your short term debt each period with the conversion of cash from accounts receivable.
- Trends. Get a good feel, as often as possible, for your sales trends and any changes that may be necessary to your current processes. Pay attention to your gross profit, gross profit margin, and if your operating expenses require any adjustments. Running a clean company pays off if and when you sell your company, but you reap the rewards while you're still in control, and often the payout presents itself in your net profit.
- Expense Control. Remember, your change in gross profit should run alongside your change in operating expense. If you're watching these lines cross, it's time to reevaluate where some cuts in OE can be made.
- EBITDA. The bankers holy grail; in short- your cash flow. Your earnings before interest tax depreciation amortization (EBITDA) look different for each company, but again, running a clean company pays off for you in the short term. This information is critical for any future loans, or bank products you may be considering for that expansion, or new piece of needed equipment. Remember to keep clear record of each category, and talk with your CPA or banker if you need clarification on which items to depreciate.
- Debt to Equity Ratio. As a business owner, it's likely you've heard your banker and accountant take opposite positions on this topic. It's ultimately your choice how much equity you leave in your business. As a general good practice: don't over leverage your company without leaving a reasonable amount equity in.
If you're looking for a little guidance on your business's financial health, FIVE:thirty is always happy to help. However, don't forget to utilize a good working relationship with your banker for clear direction. Often we forget to utilize the current sources of (free) advice we have at our disposal. A good banker and account want to watch your business succeed as much as you do, and are happy to help provide some council and clarity.
After every periodical glance at your company's financial health, remember to get back to doing what you love. Don't dwell on the bad if there's anything to be fixed. You can always change things about your company, and as the CEO or director, you have the control and ability to do it exactly how you want. If you need a little help, send us a note. Consulting with care means you don't have to figure everything out alone!