by Michael Lodge
Part of a tax and accounting firms objective is to inform and educate small business owners on the reading of their financial tests. What they need to look at instead of only looking at how much money they have in the bank. Five important numbers that every business should look at has been written about and explained wonderfully by Barry Moltz of QuickBooks. He has explained in the best way what is needed to be looked at and how other people looking at your financials will judge your company, based on your financial statement. Pay more time in looking at your financial statement with your accountant. Please see his article below.
Small business owners need to know a lot of numbers. Even for the most experienced, trying to figure out what exactly to look at while simultaneously trying to manage their company can be confusing and discouraging. In fact, most owners do a lousy job of reviewing the information they could easily find in financial reports from theiraccounting system. In most cases, they either fail to look at them regularly or simply don’t understand what the numbers mean.
These numbers, however, are a very powerful and essential tool for managing any business. Without knowing how a company has performed financially, it is impossible to predict where it can go. In addition to reviewing the monthly financial statements, here are five other numbers that matter in all businesses, and what values constitute a healthy company.
1. The Quick Ratio ( > 1 )
By definition, the quick ratio, or sometimes called “The Acid Test,” is found on a company’s balance sheet and is the business’ current assets (cash, cash equivalents, accounts receivables) divided by its current liabilities. A favorite metric of every bank when considering a loan, the quick ratio is a measure of the financial stability of a business. It shows that the company has more cash available than the current money it owes. In most industries, a healthy quick ratio should be greater than 1. A quick ratio can be improved through higher profitability.
2. Sales Close Ratio ( > 30%, but not too high )
It is critical to know the business’ sales process close ratio, which you get from dividing the number of sales proposals you make by the number of sales you ultimately close. Of all the prospects the company writes proposals for, how many do they win? This information should be captured and calculated in a sales customer relationship management system (CRM).
This is a key number, which should not be too low or too high. If it is too high, the company is not talking to enough prospects or its prices are too low. If it is below 30%, sales reps may not be qualifying their prospects enough before spending valuable time preparing proposals. A close ratio can be improved by using focused qualifying questions.
3. Your 10 Most Important Customers
While all customers are important, not all of them are created equal. Who are the 10 most important customers that contribute to the success of a company? This is measured not only by revenue, but by their referrals, the additional products they buy, the feedback they give and their superior brand power.
Some of this information will be captured in CRM, but other metrics will need to be collected qualitatively from the team. In many companies, these top customers contribute 70-80% of the revenue. Remember, it is typically easier to sell more to these large customers than find new ones.
4. Days Sales Outstanding ( < 133% )
Days sales outstanding (DSO) is the average number of days it takes for customers to pay. The smaller the number, the better, since the business can use that cash more quickly by reinvesting it or taking it out as profit. The number should be less than 133% of the payment terms with a customer. For example, if terms are 30 days, the DSO should be 40 or less. This information on DSO can be found in the company’s accounting system. DSO can be improved by giving out less customer credit or collecting payments more quickly.
5. Operating Cash Flow ( > $1 )
How much positive operating cash flow did the business produce last month? Profit is important, but cash flow is king. This number is found in the business’ cash flow statements. By definition, cash flow is simply the sum of your monthly profit and any changes in accounts payable, accounts receivable and inventory. The higher this number is monthly, the healthier the company is. Most accounting systems will produce this statement.