In any business, money comes and goes. There is income and there are expenses, and for a business to be successful, the former must outweigh the latter. That said, even small businesses understand that a fluid financial situation is far more complex. There are simple considerations like allocations for payroll and suppliers to consider, as well as items of value like materials that are slated to be used for production, or merchandise that you have yet to sell.
Then there are expenses like marketing that should amount to payoff in the form of increasing customer support, or training for employees that equates to greater efficiency and profitability, for example. There’s money in the bank, interest on investments, and funds coming down the pipeline that have yet to arrive. Managing business finance is no easy task, which is why most companies eventually require the assistance of professional accountants to keep things on track.
Still, business owners need to have at least a modicum of understanding of where their finances stand in order to measure performance and create sound business strategies moving forward, and this means incorporating specific financial data. Here are just a few of the most important financial data points every company should use to inform their business strategy.
Here’s a simple question: how much money do you have coming in? Is your revenue growing over time, and if so, at what rate? How many clients/customers are contributing to your revenue and is any single client contributing a large percentage (potentially signaling a problem if that client stops purchasing)?
How does your revenue average out against your payroll – in other words, how productive are your employees? For the purposes of strategic planning, it’s essential to not only have a good handle on your revenue, but also the growth over time and anticipated growth. Without a good basis for future revenue, it’s hard to plan for future growth.
Revenue is the cash coming in. Profit is the portion you earn minus expenses. It’s an important distinction for the purposes of business strategy because the cash you have left after you’ve factored in expenses is the extra you have to reinvest in your business. If you’re looking to grow, your profits are the key to determining what steps you can take in the near future and the long-term.
Money can move fast in business, and a lot of your company value may be tied up in product. This cannot be counted as money in the bank. Liquidity is how much actual cash you have on hand, or can get your hands on in the immediate sense (i.e. what you have in bank accounts that you can withdraw at a moment’s notice to pay creditors, vendors, and so on).
Why is this important? It has to do with your ability to pay off liabilities, but more importantly, it plays a role in getting loans. Many businesses rely on periodic lending to weather slow seasons, pursue growth opportunities, and so on. If your liquidity is insufficient, your business may represent too big of a risk for lenders, and this could seriously impact your ability to gain needed funds through loans to move forward with planned strategies.
Capital Efficiency and Solvency
Your investors are naturally going to be concerned about your return on equity, or the amount of money that’s going back to investors from your earnings. Lenders and investors will also take an interest in your debt to equity ratio, or how much your business is leveraged, and more specifically, whether the amount of leverage you’re using to operate your business is reasonable. Your relative level of capital efficiency and solvency will have a marked impact on your ability to obtain additional lending and investment dollars.
This isn’t a data point many businesses would list as crucial when forging a business strategy, but the relative efficiency with which you’re using your resources could have a major impact on your revenue and profitability, among other points, so it’s one you really shouldn’t overlook. How fast are you moving inventory? How effectively are you managing customer accounts?
If your operational efficiency is poor, it could inhibit growth, and this could inform your ability obtain needed investments or lending. This, in turn, could impede your ability to achieve strategic goals.