Friday March 1, 2013

Tracking Your Company's Critical Number

Financial literacy is critical for small business owners. Not knowing how to properly track the money in and out can have detrimental results, draining a business of funds through uncontrolled spending and poor operational practices. 

Know the Terms: 
Here are some key terms to help you on the path to financial literacy. 
  • Net Income: This number lets you know precisely how much money you’ve earned once all revenue is tallied up and all expenses have been subtracted. 
  • Gross Margin: This number gives you the difference between revenue and cost before subtracting general and overhead costs. It is typically calculated as the selling price of an item minus the cost of goods sold. 
  • Cash Flow: This number shows where cash is coming from (sales, revenues, loans), where it goes, and what is left over each month. 

Make a Statement: 
Here are the main financial statements you’ll likely use for your small business. 
  • Balance Sheet: This worksheet adds up all of your assets and subtracts your liabilities; the remainder is your equity in the company. This sheet gives you a good “snapshot” of your current financial situation. 
  • Income Statement: This statement is typically generated at the end of a month or quarter. It adds up all of your sales and revenue and subtracts your expenses, giving you a net income for the period. 
  • Cash Flow Statement: Another periodical statement, this worksheet shows where cash came in and where it went out, and can help you plan for projected cash shortages. 

Crunch the Numbers: 
Financial ratios provide you with a more simplified number based on relation. Here are the most important ratios for managing your small business. 
  • Current Ratio: Current assets divided by current liabilities
  • Acid Test: Current cash divided by current liabilities
  • Inventory Turnover: Cost of goods sold divided by average inventory 

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