Your ability as a business owner to make long-term financial plans for your business depends on tracking and analyzing important financial metrics.
But with so much information at your disposal, it can be difficult to know which data is the most important. With this in mind, here’s a quick overview of the metrics you should absolutely focus on as a business owner, beyond simple numbers like revenue and profits.
- Accounts payable: Accounts payable tracks the bills you need to pay but have not yet paid. This is, essentially, your short-term debt and expenses. This information will show up on balance sheets as a liability. You must track your accounts payable if you are to be able to properly manage your cash flow. Otherwise, it can become easy for you to fall behind in payments and become overwhelmed with debt.
- Accounts receivable: This refers to the money owed to you by customers for services rendered or products provided. This shows up as an asset on your balance sheet. It’s important to keep in mind thatthis is not money you already have in the bank, but money that’s owed to you. Tracking your accounts receivable helps you make sure you get paid by your customers in a timely manner.
- Operating margins: Your operating margin tracks how well you are generating income after spending money on other areas of your business. Larger margins mean more successful business.
- Cash flow forecasts: Businesses often fail because they are unable to meet the cashflow demands they have. This is why it’s crucial to monitor your cash flow forecasts each month. This will help you make sure you will have enough cash to pay certain bills, or refill your inventory. It will also prevent you from being surprised by sudden financial problems or shortfalls.
- Cost of goods sold: It’s not just enough to make sales—the sales you’re making actually have to be profitable. You need to track the cost of the goods you’re selling if you’re going to price them out in a way that is profitable for your business. Otherwise, you might find that you’re actually losing money on your sales.
- Cash burn rate: The cash burn rate for your business is the measurement of how quickly you are using your cash reserves or cash balance. It is important to track this so you can maintain a healthy cash flow and prevent yourself from spending through your assets when you might need them in the near future for other expenses.
- Cash flow runway: Your cash flow runway is the cushion you have for your business. It answers the question: “How many months of cash flow do I havebefore I go broke?” This is especially important for new business owners. You need to consider how long you can expect it to take before your business becomes profitable. If you don’t have enough runway to make it to the point of profitability, you will need to secure more funding, because you will go broke at your current level.
For more information about the most important financial data you should be tracking for your business, contact us at MCG Solutions.