Whether you are launching a new enterprise or have been running your small business for years, you need solid financial data to make sound decisions today and down the road. Entrepreneurs often focus on basic financials such as how much to charge for their products or services, what they can afford to pay staff, and how much they want to make in a given year. However, they may not take the next step and set up financial tracking and reporting.
Without reliable numbers, you can end up making choices that will affect the future of your business on the basis of anecdotal evidence or gut instinct. While we understand the value of intuition, putting yourself in this situation is not ideal for long-term business success. As we get ready to celebrate Cinco de Mayo, we’re sharing five basic financial numbers that you should be reviewing regularly in order to grow your small business strategically.
1 – Cash Runway
“Cash runway” refers to the length of time in which a business (typically a start-up) will remain solvent, assuming income and expenses stay constant and they are unable to raise more money. To calculate a company’s cash runway, divide total cash by the cash burn rate (the amount of monthly cash that a company spends before it starts generating its own income). For example, if a business with no revenue has $100,000 in the bank and is burning $10,000 a month, it has a runway of 10 months.
For your new business to survive, it is critical to know at all times how many months of cash runway you have before you will have to close your doors. It is also important to know the industry average for how long it takes to reach consistent profitability in your niche. Knowing how long your runway is, and how to control your cash flow, is crucial to predicting and managing the risks of starting a business.
2 – Cash Flow Forecast
Every small business owner must have a clear understanding of their company’s expenses and cash flow. Forecasting your business cash flow helps offset uncertainty by projecting your income and expenses on a monthly and yearly basis. This allows you to respond quickly when you see cash problems coming and plan for large expenditures like purchasing equipment, hiring staff, or expanding your marketing campaign.
Create a log of the payments you need to make during the coming year, such as wages, rent, loan repayments, and taxes. Then list the cash that will be coming into your business, including customer payments as well as interest on savings and tax returns. Subtract outgoing cash from incoming cash to calculate how much money you will have on hand at any given time. Most accounting software programs include cash flow forecast reports that you can create based on your existing accounting data.
It’s not unusual for small businesses to run into situations where they suddenly have too little cash on hand. Summit Financial Resources offers a number of options to help you cover shortages and even out your cash flow. Our working capital loans involve using your accounts receivable and other assets as collateral. We can mix and match from a variety of product options, including invoice factoring, asset-based lending, inventory lending, and equipment financing. We are not regulated like a bank, and we can structure flexible deals and make funding decisions quickly so you can get the cash you need – when you need it.
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3 – Cost of Goods Sold
Watching your sales steadily rise can be exhilarating for an entrepreneur, but those sales must be profitable to equate to business success. If you do not track your cost of goods sold accurately and monitor those costs closely, you may not realize that you are actually losing money on certain sales.
Many small business owners do not charge enough for their goods and services. There are numerous reasons for this, such as trying to undercut competitors’ prices or failing to pass along increases in materials, production, or shipping costs. It’s important to evaluate your pricing on a regular basis. Keep in mind that being the lowest-price provider in your marketplace can often backfire, resulting in lower profitability. Compare your prices to competitors and raise yours accordingly. You may lose a few customers in the process, but your business is not meant to be all things to all people.
4 – Accounts Receivable Percent Overdue
When your sales far exceed your overhead, your business is generating a profit – at least on paper. However, if you are failing to collect the revenue from those sales, that profit may never be realized.
Review your accounts receivable, and focus on the percentage of sales paid on time versus the payments that are late. You may want to factor in the industry average to see if your numbers are in line. If not, it’s time to establish a debt collection process for following up with delinquent customers. For example, some businesses send a written reminder at 30 days, have a junior staff person call the customer after 60 days, and at 90 to 120 days the owner makes the call. You can also use small business accounting or invoicing software solutions to help track delinquent accounts and send invoice payment reminders.
5 – Sales Revenue Allocation
As a small business owner, you have likely heard at least one cautionary tale about what can happen when your single biggest customer leaves or goes out of business. Customers and clients come and go for any number of reasons, regardless of how good your products and customer service are. Diversifying your client base is essential to running a successful small business.
If a single client makes up more than 50 percent of your income, it can be a short-term boon, especially if they pay on time. However, this can also become a long-term liability if you find yourself acting as a sub-contractor for the customer and they stop paying or decide to take their business elsewhere. Instead, invest in building a referral network that will sustain the natural ebb and flow of your business.
Putting regular financial tracking in place will help you avoid the potential pitfalls of uncollected accounts receivable, improperly priced services, and poor cash flow management that can make it challenging for your small business to thrive.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.