It’s time to take the temperature of your business. Studies have shown that businesses who manage their finances well and keep their books neat and tidy are more likely to succeed in the long run. Here at Your Balance Sheet, we can help your organize your finances and give you the information you need to make smart business decisions that will keep your profitability moving forward.
Use these five ways to measure the financial performance of your small business to determine your company’s financial strength.
1. Increasing the Bottom Line
The simplest question to ask is, “How much money are we making?” If you’re consistently making more money, you’re performing well. However, note that “bottom line” includes more figure calculations than simply your net income from your services or product sales. The bottom line takes into account income and expenses. Yes, your income may be increasing, but are your expenses increasing at an equal or greater rate? If so, then your company isn’t performing well financially. At the end of the day, you want your “bottom line” to be steadily increasing. More net profit is a good thing!
2. Strength of Your Balance Sheet
The strength of your balance sheet is determined by comparing your assets versus your liabilities at a given point in time. The more assets you have and the less liabilities you have, the better your business will be. Compare your current balance sheet to your previous balance sheet reports. Have your assets increased and your liabilities decreased? If that’s the case, you’re doing well.
3. Low Risk Assessment
Running a business is a risky venture. A customer may be late with payments, clients might sue, or your company might need to default on a bank loan. In order to assess your risk, consider the following equation:
Probability x Consequence = Risk
Probability = the likelihood of a problem occurring
Consequence = the amount of money lost if the problem did occur
There is no need to assign specific values to these variables, but we want you to take a step back and consider your business’ status. Think about various aspects of your business’ state or practices that would affect this risk equation (company’s financial condition, quality control practices, lient tendencies, etc.) Does your business operate under a high level of risk? If so, it’s important to identify ways to reduce that risk. This will, in turn, increase the financial performance of your company. Less risk is better, and making more money while decreasing the amount of associated risk is the best way to go.
4. Decreasing Time Invested by the Owner
Another method of measuring the financial performance of your business is to consider the time invested by the owner. Over time, are you investing less time while your bottom line simultaneously increases? If so, your business functioning well and your financial performance is superb.
5. High Fair Market Valuation
The “fair market value” of your business is calculated by estimating the value of your business based on what an educated, willing, unpressured buyer would pay. The more a potential buyer would pay for your business, the better your business is performing financially.
If you’re having a difficult time with your business finances or need assistance with accounting work, we’re here to help you. We offer services to assist with daily accounting, monthly financial statements, audit support, bookkeeping cleanups, and tax filings. To truly understand the financial performance of your business, you need accurate, organized reports that will give you the information you need to make smart business decisions. You want your company to measure well in these five areas, and we’d like to help you.