Starting your small business and growing it into a sustainable, income-earning machine is about more than just making sales and hoping for the best. Instead, you must treat your small company much like you would a valuable car engine, and run frequent performance diagnostics.
Performance and profit tracking will not only give you a clear picture of how the business is doing, but it will also let you sniff out where specific weaknesses are causing problems. You can then take concrete steps to adjust whatever causes them and heavily increase your chances of long-term growth.
In basic terms, small businesses that eventually grow into larger businesses often pull this off by tracking performance as professionally as possible right from the beginning.
Here are four key metrics of profit and performance that deliver some of your most powerful insights:
1. Your Cash Flow
The first sign of health in any business is cash flow. Sure, there are VC-funded companies that can survive for years without acquiring a single customer, but they operate in a different world of massive external subsidies. In your case, you can’t count on this. Instead, develop a cash flow statement that rigorously tracks every penny coming into your company and all of the money that’s going out.
Ideally, the former will be greater than the latter, but if not, your cash flow tracking will let you find out why not, and what expenses you can change to fix the problem.
2. Profits and Losses
After first establishing revenues from paying clients, profits are the next most important thing you can achieve. Large, heavily funded companies may be able to get away with multi-year losses, but you as a small business owner probably won’t be so resilient. To avoid problems, track profits and losses, and recalibrate as persistently as possible to ensure that profits exceed costs rapidly and sustainably.
It’s usually not that hard for many businesses to gain revenue, but if your revenue doesn’t leave a manageable profit margin, the losses will eventually kill your business. It’s also easy to get so excited enough about revenues that you neglect profits for a while. This is okay at first, but it can’t be allowed to last.
3. Accounts Receivable
Accounts receivable are all your outstanding invoices for products, services, or other sources of the unpaid debt to you. You should carefully track just how much of your cash flow is typically locked up in accounts receivable and for how long. If your unpaid accounts receivable stretch out until they overlap the deadlines on the debts and costs you yourself have to pay, it can mean defaults and credit problems. This can happen even if you’re owed lots of money.
For new businesses in particular, it’s sometimes difficult to be confident about insisting on payments. Despite the emotional speed bump this might cause, it’s crucial for success.
4. Accounts Payable
These are the debts and costs you yourself have to pay, and they’re also the reason why it’s important to have your accounts receivable coming in on time. Accounts payable should be monitored carefully so that they don’t consistently bury accounts receivable or business earnings.
Monitoring accounts payable lets you see just how, when, and why you’re letting them overwhelm the money you have coming in.
Nolan Accounting Can Help You Measure Success
Essential accounting and financial performance tracking is just one aspect of all the work you’ll have to put into your small business each day. Because of this, it can quickly become overwhelming and especially so if your business starts to grow quickly.
In order to handle the burden of monitoring profit and loss metrics without losing time for customer acquisition, you should consider the services of a professional small business accounting firm. Nolan Accounting can track the quality of your finances so that you can focus on growing them and your business instead.