20 Oct Why Money Metrics Matter
A Quick Guide to Looking at Your Business Finances
All over our website and our blog, you will hear every single person on the Two Roads team rant about why your numbers matter.
For the entrepreneur and small business owner, we say things like:
- “Your numbers are the roadmap to your business success.”
- “You can’t see where you are going, if you don’t know where you are or where you have been.”
- “Know your numbers, run your business!”
And the list goes on…
But what does that really mean? I realized that we had never actually just stopped to talk about why your finances are the key to turning your successful small business into a powerhouse. Let’s do that today!
I won’t answer ALL the questions today but let’s start the conversation. If you still have unanswered questions, no worries! We are a company that highly values availability. It is rare in this day and age but we actually have a phone number! And if you have questions, we will actually answer the phone! Talk to you. Of course we have convenient online forms and emails and all the like but when it comes to your finances, we believe you are the one who should have the facts and be in control. Because of that, clear and available communication is an integral part of our business model.
So without further ado, let’s talk about what your numbers can do for you!
CONNECTING THE DOTS…
Maybe you have made it past the first couple years and you know that your business is making money. You know you have great months and you know you have tighter months but you can’t put your finger on why. This is where your numbers can draw the lines between your sales and your cash and profits.
The better you understand how your business operates from a profitability perspective the better you will be equipped with knowledge of how to make improvements to your business model. The best way to do this is to look at your numbers from three different directions.
In order to run your business right now, you need to know what your business needs. Is it healthy? Is it struggling in one area but thriving in another? What needs attention? These vital stats have to be available to you on a monthly basis in order for you to KEEP your business successful.
Remember, just because you are successful now, doesn’t mean you are guaranteed on going success!
On a monthly basis, you need to be looking at your:
- Revenue — how much are you selling?
- Profit — how efficient is your business at retaining revenue?
- Expenses — what is driving your profit up or down?
- Cash — when and how is cash flowing in and out of your business?
- Debt — are increased sales causing debt to climb or is being managed proportionately?
These categories need to be broken down into the specifics of your unique business. How you make and spend your money is highly specific to your industry. This is where researching KPI’s (or Key Performance Indicators) come in handy. Looking at what the norm is for payroll costs for your size marketing firm will tell you whether or not that expense is worth it or if you need to figure out how to pare down to increase your profit. BUT you can’t make these real time, directional shifts if you don’t have the cold hard number facts.
Regardless of your business goals, at the very least, I assume you want to better your own business from the last year. Every small business owner wants to see their business grow and thrive, not stay stagnant. This means you need to clearly see how your business performed each year, from a month to month perspective.
Taking the numbers we talked about for the present, you need to spend time looking at these in comparison with your business trends in the past. Now, if you are just starting to gather this kind of data for your business, give yourself some time to build up a financial history to compare.
Once you get there, some valuable information you can get from this comparison could be:
- Noticing trends of slow and busy months and appropriately preparing.
- Smart budgeting for month you know typically have a lower cash flow.
- Ability to strategize to increase sales for “off” months.
- Noticing the effectiveness of marketing investments.
Again, with the uniqueness of your business in hand, there really is a deep well of information to be drawn from. The bottom line is, with these trends at your fingertips, you become a SMARTER leader for your small business.
So far, these categories have been typical of bookkeeping — a practice that tends to focus on the past. BUT let’s push the boundaries together! The power your numbers can give you doesn’t have to stay backwards facing.
When you purposefully keep good books, or make the investment into someone doing that for you, you can use those numbers to actually PROJECT where you are heading! Your bookkeeper should be providing you with prediction charts and models that show where your company is heading in terms of those key numbers we listed out on top. Mainly, you can see if your sales and cash are heading in the right direction. This information can tell you if you are on track with your budget and yearly goals.
Don’t like what you see? That’s the brilliant part. You can see this information and bust it to adjust the course of your business NOW! You can choose to focus on your higher selling items, cut out the less profitable ones, make a big marketing push, trim the fat in your expenses and the list goes on. The point here is that you get to remain in control. You get to make purposeful decision to direct your business where you want it to go instead of react to what has happened.
Hopefully now you can see why we are SO passionate about making sure that small business owners have their hands on their financial metrics.
If you have this information, you have the power to choose success in greater and greater increments for your business. THIS is why we say making the investment into bookkeeping is like buying the roadmap to your business success. Sure you can maybe get there without it, but how long will it take and how many wrong turns will you have to waste your time, money and energy on?