Small business owners know to keep a close eye on their financial metrics because it can mean the difference between going out of business and thriving. Since they do not have as many products and customers like huge corporations, they tend to be quite sensitive to any signs of the company struggling.
Some entrepreneurs are smart to hire experts to handle their books, their taxes, and their income as well. While hiring someone to do these roles can be good, business owners should still have a basic knowledge of financial terms so that they understand their accountant, lawyer, and even their partner as well. The last thing you want is to be cheated because you simply did not have the background, training, and experience in the field.
5 Financial Metrics You Need To Understand As A Small-Business Owner
A business has to make money, otherwise it is a charity. But beyond earnings, income is vital to give business owners some bit of money they need to continuously invest in the company and especially the product.
This is another self-explanatory financial metric, but a hugely important one at that. Expenses should be monitored in order to ensure that they do not go over the income so that the business remains profitable. The end goal of entrepreneurs, after all, is to have profit and earn from the enterprise.
Many small businesses have died early deaths for many years simply due to inadequate cash flow. This means they do not have any more money in the account in order to continue operations. This is a hugely important metric that small business owners need to keep a sharp eye on.
Accounts Receivable Aging
This metric refers to the length of time it takes the customers taking advantage of credit terms to pay their invoices. Small businesses may offer 30, 45 or 60-day terms, but the vital question is if they are actually paying on time. After all, you need to make sure money is coming in to be able to continue operations.
Accounts Payable Aging
Similar to Accounts Receivable Aging, this refers to payment terms, but in this case the financial obligations of the business itself. It may be for raw materials or equipment and other assets of the enterprise that are being paid in credit terms. Meeting these payment deadlines is also important to avoid fines and other financial issues.
Small business owners need to keep track of all these metrics and manage them so that expenses, including Accounts Payable, do not exceed income. It is also a huge plus when customers pay on time so that your business will always have enough cash flow to survive. Moreover, you might want to take a deeper look into one or a few of them to see how the business is performing.
In a startup or small business, it might be tough to balance them all at the beginning. However, if you manage them all well, and continue to find ways to add to and retain your customers, you will find your enterprise thriving.