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With Plenty of Tools Available, Good Financials are a Necessity

Almost everyone who’s deeply interested in the entrepreneurial spirit has watched Shark Tank at one time or another. Yet, another popular TV show that focuses on the lives – and livelihood – of small business owners is The Profit, a reality program from CNBC that focuses on saving small businesses.

Businessman Marcus Lemonis

On the show, serial entrepreneur and investor Marcus Lemonis spends a great deal of time advising potential business partners on how to make their companies successful. But not everyone takes his guidance – and it’s often to their disadvantage.

With this in mind, we found one particularly meaningful quote from Mr. Lemonis that perfectly summarizes the foundation of The Five Pillars of Business Freedom.

If you don’t know your numbers, you don’t know your business.

As Mr. Lemonis points out, and our first pillar of Financials expands upon, not knowing what’s going on in your small business financially means you probably don’t have a finger on the pulse of your organization. And with so many modern tools available, a world of useful options await you.

Yet, even if you select the right financial tools for your small business, what are the numbers that most deserve your attention? Keep reading to find out.

Financial Metrics in Small Business

What Numbers to Know and Why

While the numbers you need to know as a business owner may appear daunting, there are a few that stand out, and should be reviewed frequently from your financial dashboard.

According to QuickBooks, one of the leading financial tools available to small businesses, these key performance indicators include:

  1. The Quick Ratio: Dividing your company’s current assets by its liabilities gives you a clear indication how financially stable your business really is. Most banks and investors look at this number first when considering whether or not to invest money in your company, as it quickly shows if you’re truly profitable, or on the verge of disaster.
  2. Sales Close Ratio: Basically, this boils down to knowing how many of your sales opportunities are being converted into actual transactions. If you’re not closing enough prospects, then your numbers will undoubtedly be low, and your sales team may need some inspiring.
  3. Top 10 Customers: If you’re a B2B, who are the companies that contribute the most to the success of your company? Or as a B2C, who are your most loyal customers? This is important because it’s usually easier to encourage more sales to existing clients than working on creating new ones.
  4. Days Sales Outstanding: Does it take a long time, on average, for your customers to pay for your products or services? If so, you’ll probably want to rethink some of your customer relationships. As QuickBooks points out, this could mean “giving out less customer credit or collecting payments more quickly.”
  5. Operating Cash Flow: For small businesses particularly, profits are vital to the success of the organization. Cash flow, however, trumps profits in the sense that it shows what those profits really are when they’re weighed against operational investments. Knowing this number lets you know just how healthy your business really is.

In an article from Inc. we see that startups – or small businesses in general – are often in serious trouble when it comes to their financials. As the author, the entrepreneurial owner of BodeTree financial software, emphasizes:

Based on our experience and the experience of our partners, my team and I estimate that only 10 percent of all small businesses have up-to-date and accurate accounting information. This means that 90 percent of small businesses are unable to produce dependable financial statements when prompted.

Few will dispute the truth behind all of the excuses that used to prevent small businesses from organizing their finances. The only options that were available to them were expensive, time consuming, and incredibly complex.

Today, however, there are no more excuses. Whether you’re a small business or an organization that serves them, the 90 percent challenge is no longer a roadblock to success, but rather a reason to adopt a new approach.

Are you struggling to get your financials in order? Then it’s important to begin looking at your financial standing sooner rather than later. It may take some time to learn the ins and outs of your small business’ numbers, but it will ultimately give you even greater insight on the viability of your organization, both in the short- and long-term.

Want more tips from entrepreneurs who have also been down the path of small business ownership? Listen to our radio show The Second Stage for more advice on getting your company financially stable and becoming a better business owner and leader.

Posted by: Brendan Anderson A co-founder and managing partner at Evolution, Brendan has spent the past 20 years as an investor and manager of businesses ranging from manufacturing to financial services. @Brendan_Andersn

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