Blair Morrison, CEO

Knowing Your Numbers as a Small Business Owner

I spoke recently with a successful small business owner I’ve known for years. We were talking about indicators, knowing his numbers and how to improve the business.

He quickly ran through what he was watching:

  • Project margins
  • Revenue growth
  • Profit
  • Cash
  • Plus a few additional metrics specific to his industry (mostly margin related)

He asked me, as a CFO who knows a lot about finance, what he was missing and what else he should be watching. I paused. Then, knowing this individual, knowing how carefully they study their business, knowing that he knows his numbers, I told him this:

You know more than you think you do. Accounting and finance can feel overwhelming because the terms are foreign or because it always feels like there should be something else you are looking at. But the truth is at the end of the day if I was an investor, a debt provider or anyone else looking to partner in the growth of your business —I’m looking at those same things.

4 Business Metrics to Track for a Successful Business

With my investor hat on, my list is short when it comes to metrics you should be tracking for a successful business.
  1. Revenue and revenue growth over the last year. Growth = good, decline = concerning. Where are your customers going?
  2. Gross profit margin. This one is called a few different things and defined differently by industry. What is a good metric here? Depends on the industry. Trends here matter A LOT, is margin going up as revenue goes up or down? Up is good, down is concerning. Why is important.
  3. Net income/profit margin. Across the board, if you aren’t investing all of your revenue in growth, a stable business should target at least 10%. Trends (pattern over time) here also matter: an increase over time shows an improvement in the business, while decrease is concerning.
  4. Cash flow. Unless you are on a strict cash-basis accounting, this is different from profit. This is the change in the balance of cash in your bank account over time. How much cash increases (or decreases) on a monthly basis is called your cash flow. This is the amount of cash your business is generating monthly. And it’s a huge indicator of success.

If you can get people to pay you money for your product or services (revenue), provide that product or service for less than you are paid to do it (gross margin), and they pay you more than the operating cost of running your business (your salary, insurance, rent, etc.), and your customers pay you in a timely fashion (usually the biggest drag on cash flow is slow customer payment), you have a successful business. Congratulations!!

Not as complicated as you thought, is it?

Improving Metrics for Your Business

If you haven’t taken a class in accounting (and honestly, why would you if it wasn’t required?) you may find the balance sheet part of your financial statements a complete mystery. I took several accounting classes and still took years to really “get it.” The good news is you don’t HAVE TO “get it” to understand where your cash is going. In fact, I’m going to say something a little crazy. Outside of the cash line item, skip it. For now, at least!

Instead, jump right into the Cash Flow Statement. Most business owners will go the entire life of their business and never look at this important report. I think this is a travesty. The Cash Flow Statement is a shortcut to figuring out where all of your cash is going—it’s right there in the name! First, let’s walk through the key pieces of this amazing report. We’ll start from the top.

Analyzing the Cash Flow Statement

So how do you grow your business? Well, in theory you increase revenue, but be careful not to increase revenue at the expense of a long-term reduction in gross profit, profit and cash flow. Short-term decreases can be “investments” in your business’s growth, long-term decreases in those metrics are simply bad business decisions (yep, I said it!).

How do you improve gross profit, profit and cash flow? The devil is in the details here.

Gross margin.

It’s about digging in and figuring out why certain customers or sales channels are more or less profitable than others.

Profit margin.

Here is where we dig in and determine the following things. What expenses in your business are needed for you to run your business? What expenses are a nice to have (I’m a big fan of bagel Fridays, myself)? Which expenses are simply waste (subscriptions you aren’t using, vendors that aren’t working out, dare I say it: employees that aren’t pulling their weight) that you can drop?

Cash flow.

Take a look at a report called the statement of cash flows. If this idea terrifies you, set up a free 30-minute call with one of our CFOs and we can do it with you. I promise you, even for someone who loves numbers and financials now, there was a day not too long ago the cash flow statement intimidated me.

This statement of cash flows (in QuickBooks Online) will start with your net income (profit) and the remaining items on the page will clearly explain the inflows and outflows of the cash in your business. Accounts receivable (money people owe you), inventory, accounts payable (money you owe people), and principal payments on debt are some of the items you will see here. A negative value is a “use” or decrease of cash and a positive value is a “receipt” or increase of cash. Hopefully a little less scary now?

Dig Into Business Numbers With Help From AutoCFO

If all of this feels a little too much and you want some training on how to look at your business (and someone to tell you how you are doing), AutoCFO is a small business-focused CFO firm. We work exclusively with small business owners and operators to help them build better, stronger, more resilient businesses. We translate accounting information into practical business decisions and help you dig into the details of improving your business.

Side note: We believe so much in the core metrics that we provide them for you in a dashboard within 30 seconds of you setting up your business on AutoCFO.

Partner with a CFO to put your financial worries to rest.