Tracking your financials is kind of like eating your vegetables: It may not be the tastiest part of running your business, but it’s good for your company – in the short term and the long.
Financial indicators can tell you a lot about your company’s performance. And more than that, if you understand and focus on particular metrics, you can use them to enhance day-to-day business operations and as strategic tools for moving your enterprise forward.
To be in command, stay on top of the following six types of financial metrics:
The two basic ratios
One of the most important things for you to know about your enterprise: Is my head really above water? Am I better off financially to be in business or not? To determine that, you need to look at your balance sheet as well as the profit-and-loss statements that track daily income and outgo.
Your balance sheet will reveal two crucial ratios: the current comparison of assets to liabilities, and equity to debt. Ideally, both should be two-to-one, and you definitely can’t afford either one to be negative.
“Many times entrepreneurs will be running at a loss, but they don’t feel it or see it because they’re delaying payment of payables or pulling on a credit line to finance a loss,” says Sandy Abalos, a CPA in Phoenix. “The key to improving both numbers is to reduce debt.”
Snapshot of your cash flow
Cash is king in business, so you need to know month-to-month that your cash flow is positive.
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