There are few things that are quite as important to the ongoing health of your business as its finances. It’s not just about how much you have in the bank, either. Without the complete financial picture, it can be difficult to tell how well you’re really doing, or what potential future moves you might have, be it in investment, selling the business, or otherwise. Here, we’re going to look at how you can get that more complete picture, and how it benefits you.
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Cash Flow Is Key
When it comes to the day-to-day running of your business, knowing how much money you have on hand just isn’t enough. Financial literacy is a critical trait in successful business owners, and the first thing to learn is what your cash flow is. This is basically how much money is coming in, how much is going out, and whether or not you have the access to funds you need to cover your operating expenses. If your cash flow starts going negative, you’re going to have trouble paying bills on time, reinvesting in the business, and managing unexpected costs without stress. Track your cash flow and, if necessary, start thinking of ways to bolster it, whether that’s by cutting costs, raising prices, or growing your offerings to expand your market.
Understand Your Profitability
While cash flow can help you better understand your revenue in the context of your business costs, you need to go a step further to evaluate your profitability. There are different kinds of profit, as well. Gross profit is how much your business makes on selling its goods, taking out the costs of production and provision (such as labor costs). Net profit, also known as the bottom line, takes that but also factors in all of the operating expenses, interest, taxes, and other costs. Gross profitability can help you better determine how much money you’re making on specific items and services, while net profitability is a clearer picture of whether your business is making money in general.
Know The Worth Of Your Business
If you want a full picture of the overall financial health and value of the business, then you need to calculate precisely what it is worth. This typically starts with your assets, looking at how much you could potentially get for property, equipment, and supplies if you were to sell them. A full valuation goes even further, however, looking at cash flow, revenue growth rate, profit margin, and more. There are tools that can help you calculate a complete valuation based on your industry, like this dumpster rental business valuation calculator. This can give you a good idea of how much you could sell your business for. Meanwhile, the more basic asset worth calculation can help you see where you could potentially liquidize assets in the business to maintain a healthy cash flow when necessary.
Keep An Eye On Credit And Debt
The liquid cash, assets, and income aren’t the only finances that your business potentially has access to. Businesses often make use of credit, whether it’s an open line of credit to handle expenses or a loan to support expansion and further investment. As such, every business should focus on building a strong credit score, as well as a low debt ratio, and an active repayment strategy for any existing debts. This way, banks and lenders are likely to look much more favorably on your business when you need them. It also reduces your risk of finding yourself in dire financial straits if your income suddenly drops or you find yourself having to cope with unexpected expenses.
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Know How Well You Can Handle Risk
You shouldn’t expect that the weather is always going to be sunny and the sailing smooth. Effective business leaders have to be able to navigate challenges, as well as maximize their successes. Market shifts, slow seasons, economic uncertainty, and even unexpected costs can all change your financial prospects. Make sure that you’re able to weather these periods, whether it’s with an emergency fund, good insurance coverage, or the ability to scale back costs without compromising your long-term operational health. Measure how well your business handles risk by reviewing savings reserves, insurance coverage, emergency funds, and operational flexibility. If you don’t have enough liquid capital to manage shortfalls or weather downturns, that’s where you should start looking.
Operational Efficiency Matters, Too
Given that your business’s profitability and cash flow both depend on your ability to produce and supply goods or services while keeping costs manageable, a closer eye on the operational efficiency of your business is worth tracking. Cutting costs by reducing material or service quality is often not a wise long-term move, so instead, you need to look at how you can streamline your business. In manufacturing, for instance, this can include reducing downtime as much as possible and improving logistics to keep your production line as productive as possible. Other businesses might look at software that can automate admin tasks, freeing their team up to handle the work that more directly contributes to winning and pleasing customers.
Get A Good Idea Of Your Growth Potential
For long-term plans, you need a long-term understanding of your business’s finances, as well. For instance, you should do your market research to see if your business has room to grow alongside market demand and customer trends. You might also want to look at your operational capacity and how easily you can expand it, whether that’s by hiring new staff, purchasing or leasing more property, or investing in additional marketing. Getting a good estimate of your growth potential is about looking at whether the market can sustain future scaling efforts, as well as whether your finances (including potential credit lines) can support it, as well.
Understanding your business finances is critical. If you’re not already doing so, start tracking your cash flow, calculating your profitability, paying attention to your credit, getting the whole scope of your business value, and more. It will make you a much more effective business owner.
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