It’s not uncommon for entrepreneurs to miss important financial clues that tell them about their business’ future. After all, you have a lot on your plate. But, accounting numbers offer invaluable insights into what’s happening with your cash, for example glimpses at inefficiencies or if your salary doesn’t align with your business plan.
When you recognize the importance of tracking these numbers and deciphering what they are telling you, you can measure success and you can get more control over where your business is heading. In fact, you can also become more proactive in your financial planning so your money works for you, not the other way around.
What Is Your Cash Flow Telling You?
There are three things to watch when it comes to cash flow:
You need to follow your outstanding invoices, so you know when money is coming in to cover payroll and your bills. However, accounts receivable also helps you plan for important things such as purchasing new equipment, how much you can contribute to your cash reserve or if you might run into a possible cash shortfall. The only way to know these things is by reviewing your accounts receivable on a regular basis.
Better yet, can you refigure how you take payments and actually get paid upfront to eliminate lost payments? If you aren’t in the actual business of financing, it helps to remember that you aren’t in the business of financing. We always say, don’t solve the client’s problem until they’ve paid. You only begin the work when payment is rendered.
Getting paid upfront, eliminates the back and forth challenges that occur when trying to get paid. And frees up team member hours to work on things that actually strengthen your business.
If you don’t follow this, you could run into issues with your expenses happening to you instead of you happening to them. And with so many bills set up online, they can happen to you again and again without you even knowing. If you can’t have your eye on this, you should be sure to delegate it so someone is keeping watch.
For example, a company we work with cancelled an expensive recurring subscription. But the automatic payment never actually stopped. The payment kept going through. This cost the company over 10K over time and once caught, the vendor did not offer a refund. The money was just lost.
Another example is when an office manager at a company we serve made an error on paying out child support through the company’s payroll. Because no one was watching Accounts Payable, she paid it out twice for months. That money went to the families monthly and was unable to be retrieved.
Cash planning helps you set goals based on the cash resources available. Knowing when you are expecting more money, allows you to plan where to use that money – before it disappears into Accounts Payable.
Active Cash Planning gives you an idea of what your business’ monthly account receivable and accounts payable expectation is. This knowledge gives you a benchmark to follow allowing you to see any major discrepancies and get them corrected before it’s too late.
They all work together, and should be tracked on a regular basis by you or delegated to someone you trust. By tracking accounts payable and receivable you can become more efficient at cash planning and ensure you are allocating cash more effectively.
What Insights Can You Gain From Gross Margin?
When you keep an eye on gross margin, you can achieve healthier profits because you know where you need to look for cost savings. Gross margin can and will change over time. You should not set it and forget it. Costs go up. Overhead goes up. Products or services become irrelevant as technology advances. Reviewing Gross Margin is an investment into higher profits.
Your goal is to achieve the highest margin possible, but never sacrifice quality that can negatively impact sales. Signs of increases or decreases in profit margin show you when you are succeeding in managing costs or failing to deliver your product or service efficiently. You also need to keep an eye on the competition and determine if you are charging too much or too little. Your pricing strategy has to allow you to earn as much as possible while still meeting customer expectations.
One of our clients has a lucrative repair company, but he also offered to mail parts to customers who wanted to fix the problem themselves. When he reviewed the gross margin of this parts service, he realized he lost money every time they fulfilled one of these orders. Without stopping to analyze his gross margin, he would have continued to lose money on an offer that was never going to serve his business.
It’s so easy getting consumed with trying to take care of your customers, that you lose sight of how your gross margin affects your whole business.
Salary Versus Profit
The buzz word here is Lifestyle Congruence. How do you earn the salary you want, and keep your business successful? You may have set this years ago, but a yearly review is important.
And it’s just as important to ensure you set up how you get paid as the owner of your business. They must be properly planned to maximize your benefit.
As the business owner, you must set the right reasonable salary for the job you do within the company. This is the salary you would pay someone to take over this position. This is the amount you set up for yourself through your payroll and pay payroll tax on.
In addition, as the owner, you should also have a profit allocation each period as well. Because even if someone takes over your position, you should still get compensated as the business owner. This profit allocation does not incur the 15% payroll tax thus giving you a higher yield.
As your personal goals change (you move from start up, to established business, to looking to retirement) and your business changes you want to be sure you review how you compensate yourself as the business owner and set the right sized salary for you now.
The Important Questions Answered With An Accounting Advisor
If you want to truly understand what your accounting numbers are saying, the Business Compass Program can help. Real-time accounting offers ongoing insight, so you always know:
- Where your business financials stand every day
- What financial problems you face so you can decide how to fix them
- When opportunities can help improve your bottom line
You have the clarity to create methods that keep your business management consistent, the confidence to make informed, fact-based decisions, and complete control over your business financials to sustain financial health.
The Business Compass Program was made for entrepreneurs who want to understand their financials in real-time so they can make the most of what those financials are saying.
Want to gain more clarity, confidence and control of your business financials, visit our Entrepreneur’s Guide to Accounting for more valuable articles like this one.