If you\u2019re using\u00a0accounting software, it\u2019s easy to run financial reports. But what then? There are so many numbers to look at; it can be overwhelming. Which ones are the most important to monitor the health of your business? Which numbers should you track to ensure that your business grows?<\/p>\n
Most of my clients started their business because they\u2019re amazing at what they do, but they\u2019re not business people by training. So while they know exactly how to make their clients happy, they\u2019re winging it on the business side of things. Unfortunately, this is a risky practice. A massage therapist I know recently had to close up shop and go back to working for a big spa. She is incredibly talented, and her clients loved her. But she was so focused on serving her clients that she never looked at the big picture of her business. Suddenly she didn\u2019t have enough cash to pay the bills, and she didn\u2019t know how to salvage the situation.<\/p>\n
I believe that she could have avoided this worst-case scenario if she had paid attention to the financial side of her business. In fact, to show you how she might have avoided the outcome, we\u2019ll look at how others businesses stay profitable and growing by tracking five key business numbers. A quick disclaimer\u2014every business is different. Here I\u2019ll focus on a typical service business, but feel free to consult your business advisor or accountant for more customized suggestions.<\/p>\n
Okay, so there\u2019s tons of numbers you could look at. \u201cWhat\u2019s the bottom line?\u201d Well, that expression comes from the fact that profit is the line at the bottom of the most important financial report\u2014the\u00a0Profit & Loss Statement<\/a>. \u00a0Profit (also called \u201cnet income\u201d) tells you how much money you have earned after expenses are paid out. This is a great place to start to see how your business is doing.<\/p>\n I recommend that you look back at your profit over each of the past 12 months. Is it a big number? A negative number?<\/p>\n The next step is to look at the trend. Is profit trending upward over the past year? Is it flat? Or is it trending downward? This trend helps you predict your future profit.<\/p>\n One of my clients, a boutique law firm, noticed that their profits for the current year were half what they were the year before. This didn\u2019t make sense, since they were as busy as ever. Upon closer examination, we found that their case load had shifted towards a type of work that paid less but still required a lot of time. The lawyers enjoyed this new work, and they didn\u2019t want to return to the old work. So in order to restore profitability, they renegotiated their fees for the new projects.<\/p>\n Ultimately, if your business isn\u2019t profitable, or isn\u2019t profitable enough for you to pay yourself what you want, it\u2019s not sustainable. As a business owner, stay focused on this \u201cbottom line\u201d to make sure you\u2019re earning the money you want.<\/p>\n A marketing consultant hired me recently with a very confusing problem. His business was growing rapidly, but he was taking home less and less money. I\u2019ve seen this pattern in a lot of businesses, so I guessed correctly what was happening: expenses were growing faster than revenue. The consultant was landing more and bigger clients, and he was flush with cash. So he started spending more money on the business. What he didn\u2019t realize was that his expenses were increasing faster than his revenue was growing. So he ended up with less and less to take home.<\/p>\n To avoid this common trap, keep an eye on the trend in your expenses. \u201cTotal Expenses\u201d is a line in the\u00a0Profit & Loss Statement<\/a>. Look at this total and its trend over the last 12 months. Compare the expenses trend to the trend in \u201cTotal Revenue.\u201d<\/p>\n Make sure your expenses are not growing faster than your revenue. The exception would be if you are making an intentional long-term investment, such as a new employee or new equipment.<\/p>\n Ever wish you could shake the trees and have money come out? Well your accounts receivable is as close as you\u2019ll ever get to this opportunity.<\/p>\n#2 Trend in Expenses<\/strong><\/h3>\n
#3 Accounts Receivable<\/strong><\/h3>\n