Gina Bianchini of Mightybell asked what specific measures do I look at regularly. Here’s what I said in answer to her question:
Key measures that drive a small business are super helpful and not that complicated:
Net Income Statement
#1: Revenues– how they’re trending month to month; year to year
#2: Gross Margin Percentage– Gross Margin divided by Revenues= percentage.
If it’s over 30%, you’re in good shape. If not, take action.
#3: Net Income Percentage– Net Income divided by Revenues. If it’s over 10%, you’re doing great. If not, something needs to change.
Cash Flow Statement
#4: Expense projections (yes, the big ones first) for three months based on current expenses or Cash Out.
Do you have enough cash right now to pay bills for three months? If not, how much money do you expect to collect in those three months, and what’s the shortfall?
#5: Calculate ending cash three months from now: take cash on hand today, add cash expected over three months, deduct expenses for three months and see what remains.
If you anticipate being in a negative cash position by the end of the year, you must take measures to avoid this.
My book, Accounting for the Numberphobic; A Survival Guide for Small Business Owners, will show you the options you have to keep cash flow positive.
Simple things like invoicing on time and calling the customers who owe you money go a very long way to making sure the cash position is protected.
Balance Sheet or Net Worth Statement
#6: Deduct Current Assets from Current Liabilities to see what’s leftover.
Look at your Balance Sheet’s current assets and current liabilities.
If current assets are not larger than current liabilities, then you’re risking bankruptcy, it’s just a matter of time.
In the early years, this is the only measure on the Balance Sheet I’d look at for the first two years of operation or until I got to break even.
It’s a measure of liquidity or working capital, and banks watch this like hawks. So do investors.