It may or may not surprise you to learn that a great many business owners could not recite their YTD revenue, spend or profit. Even more could not tell you what they made last year, or what they’re forecasted to make next year. And even more still could not tell you what amount of revenue, or what percent operating margin, they need in order to meet or exceed their business critical requirements. As a business owner, at any given moment, you should be able to take the pulse of your business. Interesting concept, right? 

How can I take the pulse of my business? 

The health and viability of any business can be determined by its numbers; cash flow, assets, and audience. The financial standing of any business provides a clear pulse - a depiction of success or failure (existing or imminent) - for that business. Many owners turn all of their financial management over to an accountant, and allow themselves to turn a blind eye to one of the most crucial components of business. Delegating financial management to an accountant is all well and good, but should not be treated as a license to ignore the health of your business as a whole. 

Regardless of who manages your business finances, it is your responsibility, as an owner, to always know your numbers. Some owners are more advantageous than others in this area, but as a baseline, you should know your year to date (YTD) revenue (gross), expenditures (operating expenses), and profit (net). Extra credit if you can provide your run rate (financial performance forecast). At a glance, these numbers can provide a snapshot of performance, and identify potentially catastrophic situations that are already in motion. For instance, if your YTD spend is higher than your revenue, and have no billables in queue, you are about to be in a world of hurt, if not already there. Keeping your finger on the pulse of your business finances, and making timely adjustments, will help to ensure the continuity of your business.

While the baseline numbers provide key information, they are far from a comprehensive view, and fail to provide predictive outcomes. This puts you, the owner, in a reactive state instead of proactive, because by the time you see these numbers, the damage has already been done and will continue until corrected. Let’s review a few of the tools available to help business owners practice proactivity with their finances.

The first step towards proactivity involves budgeting; determining what it costs to operate, and thereby, how much you need to make to stay in business. Building a budget is not as scary as it sounds. If you already have an accountant or CPA in your employ or under contract, you likely already have expense categories set up. If you haven’t reached that milestone in your journey yet, fear not. A quick Google search for, “common business expense categories” will get you plenty for a starting point. Assigning each line item expense of your business to a category provides a more comprehensive view of where your money is going, and provides safeguards against duplicate billing and overspending. 

Once you have determined the total cost of operational expenses for any given time range, identify the revenue for that same period. For instance, if you used the historical data from January to February of the present year to determine the operational cost of that period, you will need to determine the revenue for that same period. Then divide the operational cost by the total revenue to determine the operating margin (percent of revenue required to operate). 

Operational Cost ($) / Total Revenue ($) X 100% = Operating Margin (%)

The wider the range of time you sample, the more accurate your margin will be. When you are determining your reporting time range, beware of trends, growth, and decline patterns. It is important to factor these patterns and trends into your calculations, as these events will cause major skews in your data. By accounting for the average financial numbers for the given time range, as well as all of the major shifts throughout the year, you will allow yourself the capability to mitigate the fluctuations by adjusting your build charts/schedule incrementally to accommodate the growth or decline of your business. It is also good practice to have tiered margins; current status, worst case scenario without going out of business, and best case scenario. This way you have baselines for all possibilities. Operating margins should be reviewed and monitored regularly to ensure your business has the most up to date data available, in order to make the most efficient decisions possible.

Having a comprehensive budget is only half the battle. If it isn’t adhered to and doesn’t receive constant oversight, it is just a bunch of numbers on a page. In order for our tools to work, we have to use them. Combining your budget with your baseline numbers gives you more time to react to excessive spending, or underperforming revenue.

Another tool to add to the mix involves creating and maintaining high-level company goals. At a minimum, you should have a 1 year and 3 year goal for your three baseline numbers; revenue, spend, and profit. As discussed in Goals vs. Tasks Part 1, goal setting should be SMART; specific, measurable, attainable, realistic, and time bound. Use your business’, or industry’s, historical data to determine a SMART 1 year and 3 year goal for revenue, spend, and profit. If you just take a shot in the dark, or put up some arbitrary number, let me save you the heartache - you will be disappointed. Be SMART with your goal setting.

Now that you have established your past and present numbers, you can combine all of this data into a continuous manner, providing you with the ability to forecast revenue, sales, seasonal trends, etc. Again, use your past and present numbers to forecast your future. Do not rely on your gut here. Numbers don’t lie, but intuition does fail. With your past, present and future numbers in play, you are now equipped to implement proactive and beneficial initiatives for your business. With a clear, organized view of your business finances, you have the capability to explore cost-avoidance measures. These measures take a proactive approach and include action steps such as implementing preventative maintenance on high-value equipment, or adjusting an internal process to reduce labor overhead.

With a clear view of your business financials, you can begin to explore cost-reduction measures. For example, if you have a courier contract with tiered price breaks based on volume performance, you will likely be eligible for an increased discount if your revenue has significantly increased over the last quarter (inferring your volume has also increased). Similarly, you can initiate a vendor comparative quote to instigate contract/cost negotiations, resulting in improved benefits and/or reduced costs. The savings that can be made through these measures can then be applied to the business’ bottom line, to future expansion projects, or can even be passed back to their consumers. Cost-reduction efforts, such as the ones just mentioned, are another way for a business to practice continuous improvement and growth.

The opportunities for improvement available to the business owners that keep their finger on the pulse of their business is endless. When it comes to your finances, the more you know, the more you grow. Spending just 10 minutes a day with your books can dramatically improve your ability to run your business, past, present, and future.

When you’re ready to take the next step, we’re here for you.