Today’s entrepreneurs have no shortage of ideas when it comes to creating innovative products and services in today’s networked business world. The financial end of these ventures, however, can often fall by the wayside when the more “exciting” aspects of a startup take center stage. A dull regard for ones finances as they relate to a business’s sustainability can quickly derail them seemingly out of nowhere when diligent money monitoring isn’t established early on.
Compounding this issue is a sense of financial automation new business owners assume is possible with today’s advanced bookkeeping tools. While accounting software provides a far more convenient solution for keeping track of one’s records and forecasting short-term budgeting considerations into the future, no tool is able to give you total financial autopilot. Whether you’re completely new to small business finance or need to brush up on what you should monitor most, here are four areas you should keep close tabs on as you continue to grow:
Make every effort to keep your cash flow positive
For those who are operating on a fragile budget, cash needs to be a top concern. The “cash flow from operations” line on your statements is the key metric to monitor your cash flow in terms of your day-to-day operations. The implications of a negative cash flow are simple: you won’t be able to pay your bills and may risk running out of cash altogether if steps aren’t taken to rectify the imbalance.
Putting in the work to establish a sustainable positive cash flow brings with it the ability to devote more of your attention to the other dimensions of your business. You can begin to devote your time toward strategic business growth rather than worry about staying afloat week to week or month to month. It’s also important to understand the difference between profit and cash flow.
Being “profitable” doesn’t necessarily mean you’ll be able to sustain a positive flow of regular cash. This can become a reality when clients begin paying you through accounts receivable rather than immediate cash. Although you can account for the revenue, you may not actually be able to use it to pay bills or other expenses until sometime in the future.
Have a firm understanding on your net growth
Perhaps the biggest takeaway of this advice is to hold your net margins in the highest regard. Simply put, your net is the clearest indicator of the profit you’re making for each dollar of sales you’re closing. Looking deeper into the value of this metric, it provides a unique way to gauge your company’s ability to maintain profit regardless if your dollars of profit begin to decrease.
This is accomplished by a simply equation: your company’s net income divided by total sales. The result will give you a useful percentage of profit margins you can use to better understand your financial standing even when sales dip.
Make borrowing decisions carefully
No matter how confident you are in your product or service, borrowing too much capital when you launch your business is a huge risk. The fundamental problem is a disconnect between your business’s financial needs and borrowing payment agreements.
In essence, if your initial sales projections turn out to be less than you’d expected them to be, you’re stuck with the same monthly payments to those you’ve borrowed from. While smart borrowing can be a great way to push your company towards expansion, your business model needs to hold up accordingly.
When decisions are made to borrow too much too early, it doesn’t necessarily mean the end of your company, but it can put a heavy damper on your growth for months or years to come. With less revenue than you’d expected to see, more of your money will have to go to those you owe rather than towards new projects. Don’t find yourself a situation where your business is guided more by cash flow restrictions rather than your plans for growth.
If you’re looking for financial advice regarding a new startup endeavor, our outsourced accounting and CFO services experts can help you carve a successful future for you and your business idea.