One question many business owners have is how to keep track of their businesses’ financial health. Obviously, traditional profit and loss statements are useful, but there are many additional measures of your financial picture that can supplement the information from your traditional accounting statements by providing more detail. Here are 4 of the most useful measurements of a business’s financial state.
1. Cash Flow Statement
A cash flow statement tracks cash in-flows and cash drainage. In-flows might include collections on accounts receivable, interest payments, etc… Drainages might include payments of accounts payable, payroll, etc… This is often more helpful than a profit and loss statement.
2. Cash Flow Budget
Projecting cash flow can protect you from keeping too much or too little cash on hand. Holding on to too much cash may prevent you from pursuing some growth opportunities. Your money will not earn its maximum return. Keeping too little cash will prevent you from meeting regular expenditures.
How do you calculate a cash flow budget? Look at your beginning cash amount at the beginning of the month. estimate cash receipts and disbursements for the month, and evaluate your cash position during and at the end of the month. Then check your estimates against actuals.
How do you calculate a cash flow budget? Look at your beginning cash amount at the beginning of the month. estimate cash receipts and disbursements for the month, and evaluate your cash position during and at the end of the month. Then check your estimates against actuals.
3. Sales Projections
Sales projections function like a map, guiding and measuring your progress. Don’t just guess how much of an increase or decrease will occur as compared to last year. Look at the level of sales from regular customers, the number of leads you are generating, the strength of your sales force, the number of leads needed for a sale, and the average amount of a sale.
4. Inventory Turnover
If your business is manufacturing or retail, inventory could be the key to meeting your financial goals. Inventory turnover is one of the most informative ratios for inventory management. It tells you how many times per year you sell the average amount of inventory you’re carrying. An inventory ratio of 3 means that you generate sales revenue equal to three times your average inventory per year. A turnover of 12 means that you generate sales revenue equal to, yes, 12 times your average inventory each year. Obviously, you’ll try to aim for a higher turnover, which is a higher ratio.These four tools can help you monitor the health of your business and keep you on top of your financial standing. Along with traditional accounting financial statements, these measurements can help you see how you’re progressing in your business goals. Measurements of your business’s financial health are critical to keeping your business on track.
