“It’s all about the numbers.”
I interviewed a business owner client recently and this was his quote. Over the past 10 years, he developed a command of his financials. He knew what was going on in his business by having an understanding of his numbers, what the changes were, and what to do about it.
I had another client tell me that it’s one thing to know your numbers, but it’s different understanding what levers to pull based on those numbers to improve overall profitability.
Ratios and Trend Analysis
As a business owner, there are four things you should care about and know the ratios used to calculate them:
1) Liquidity
2) Activity (AR and inventory)
3) Leverage
4) Profitability
These ratios tracked once don’t give you much information, but tracked for 6-12 months or even longer will allow you to start seeing some trends. Whether they’re improving or declining will give you insight into what’s going on in your business. Get the ratio formulas delivered straight to your inbox!
Get A Financial Scorecard
Your financial scorecard can be something as simple as entering specific numbers from your financial statements and then tracking the ratios mentioned above on a monthly basis. How long you want to track them in one sheet is up to you, but I would suggest starting with 12 months to capture any seasonality in your business.
Putting it all together
Take the advice of the two business owners mentioned and dive deeper into your financials. Understand what numbers and ratios you should be tracking in liquidity, activity, leverage and profitability. Put those together in a scorecard and then start watching trends. If your business starts getting “sick”, you’ll be able to spot financial symptoms quicker, make a financial diagnosis, and create a treatment plan to better financial health. With this system, you’ll quickly get back on the path to greater profitability.
P.S. Don’t forget—get the financial ratios and how to calculate them delivered directly to your inbox!
