As a business owner the most useful tool to measure your success is your financial statements.
First step is to have a system in place to ensure your financial information is complete, accurate enough to use and timely.
- COMPLETE. Verify that all and only business accounts are included. Verify sales are recorded when earned, vendor invoices included when incurred and all expenses are recorded.
- ACCURATE. All bank and credit card statements are reconciled to your book balances. Accounts receivable & accounts payable are real and you understand every account that is stated on both statements.
- TIMELY. Ideally you have your financial statements available within 10 to 20 days after the end of the month.
The more they are used the more accurate they will be.
Next is to have statements that are useable. Profit and Loss statements in QuickBooks are typically in alphabetic order or they may be classified so a tax return can be prepared.
In addition, generally accepted accounting principles do not usually separate out “direct costs”. They lump them in with all the other expenses. Expenses can be grouped so it is easier to make decisions. It is important that you know all the relevant costs if you are considering moving your business or reviewing your sales and marketing costs. These statements are for your use. You want
your Profit and loss or Income Statement clearly states sales, direct costs to generate those sales and overhead. The balance sheet includes current assets such as bank balances, client invoices to collect and inventory and current liabilities such as vendors invoices, credit card balances, and next year’s loan principal payments.
Once you have something to work with, then evaluate these key items.
- Profitability is improving. Ensure that your Net Operating income is positive and near your industry average.
- Gross margin is greater that your overhead. Verify that after you pay all direct sales costs there is enough to pay your monthly overhead and a profit.
- The cashflow is adequate and maximized. Cashflow is not the same as profitability. Cash flow depends on profitability, but includes timing. In times of growth, cash flow is challenging. Profitability must be there. Then to survive, the timing needs to be maximized and outside resources, such as a line of credit, can help fill in.
- Evaluate owners’ compensation. As a sole proprietor or partner the bottom line is your compensation. As a corporate shareholder, compensation is the total of wages and fringe benefits.
- Calculate your return on investment. As an owner you are entitled to a return on investment. Due to the high risk of a small business a 25% return is a general guideline. Whether it’s your initial investment or money left in the business.
Measure at least quarterly to look for trends. Set desired results and compare where you are at – to where you want to be. Choose one area to focus on and develop a game plan to improve. On a regular basis evaluate your financial reporting system, improve the information your received, note your progress and reassess your next steps. If you need assistance, please reach out to our office. We can set up a special project to review your current financial reporting system, reformat your financial statements, clarify the measurements that are important or meet to review your results.
Mary Guldan-Lindstrom, CPA
