Who keeps track of your business debt for your company? It’s common for business owners to have accountants take care of their critical numbers. However, when all is said and done, the business is on the shoulders of the owner, and it’s important that you fully understand how to keep track of the company’s finances.
“As a business owner, you need to get over your fears and quit talking about how nobody taught you how to understand the numbers,” states Ellen Rohr, founder of Bare Bones Biz in Springfield, Missouri, and author of “Where Did the Money Go?” “The information is out there. It’s up to you to go find it.”
To track your numbers, you can use a balance sheet, which is a cumulative list of your company’s assets and liabilities, from the inception of your company until the current date. This will help you quickly understand your financial strength and capabilities. In addition, you can use your income statement, which helps you understand your profits and losses, as well as your cash flow statement, which will tell you the amount of money that came and went through the business for any period of time.
So what should you look for when tracking finances? Here’s what you need to keep track of to avoid going into debt.
You probably already track your sales; however, it’s important to compare not only current numbers with the past (a tactic Rohr says most business owners do) but also current numbers to what you want them to be in the future. So, Rohr explains, don’t simply analyze how the business has done in the past year, but also compare the progress to where you would like to be in the coming year.
“As long as you are charging more than it costs for stuff, you can ensure that you’ll continue to grow your company soundly,” Rohr says. “If you don’t have profits, then everything else is a cheap trick.” To determine your gross profit, subtract your total project expenses from the total income. You should also keep records of your profits (or potential losses) throughout the months and years, as well as your income and expenses, which will help you gain insight into your business’s profitability trends.
Keep track of your gross wages as a percentage of sales and your overhead as a percentage of sales. By determining these ratios, you can establish why wages or overhead is increasing. For instance, if the percentages rise, you can then tackle why overhead and wages are going up, why sales are going up, or a combination of all such factors.
To determine the quick ratio, add your cash and accounts receivable, and then divide by accounts payable or current liabilities. This number will then let you know how much cash you have to go toward bills. Rohr says you should have, at a minimum, a one-to-one ratio, but a two-to-one ratio is ideal. If your accounts receivable number is too big (which means you don’t have enough cash income), it gives you the opportunity to take action.
“Money that stays too long in A/R is a disaster waiting to happen,” Rohr explains.
You might already be tracking your inventory, but how often? Rohr recommends doing so every week so you know precisely when you might run into trouble.
“If that number starts to creep up each week, you might be in trouble,” says Rohr. Staying on top of inventory each week will ensure that you don’t go too long with the number increasing.
Debt to equity
If you are in debt, it’s best to create a quick check sheet. This will help you gauge where your ratio should be and whether you want to establish a budget to begin getting that debt level down as much as possible.
Keep your debt under control and you’ll not only be able to sleep better at night, but your business will simply run better too.