How professional bookkeeping support can reveal hidden trends and make your business more profitable.
As a small-business owner, you have a lot of financial obligations to meet. Paying bills, filing tax returns and meeting payroll, including commissions and bonuses — it’s a lot to keep up with. Some business leaders become so overwhelmed with those day-to-day responsibilities that they never step back and determine whether they’re meeting their primary objective: maximizing profitability.
Dig deeper, and your financials can tell you the true story of your business — if you know how to read the numbers.
Unlock Those Insights
Financial literacy is hard to come by. That’s why so many business owners turn to professional help such as outsourced bookkeeping services. Some indicators, such as revenue growth, profit margin and client retention, are universal, while others are industry specific.
Which indicators can provide the most important insights into your financials? Only a thorough analysis from your bookkeeping professional can tell you for sure, but these five are a good starting point.
1. Trending profit and loss (P&L)
Meaningful financial analytics start here. P&L is a great telltale financial indicator overall, but it’s especially important to see how your P&L spells out what’s trending over a particular timeframe. Three months is a good yardstick.
Dig into your line items such as revenue and expenses. Have they stayed consistent over the past three months, or has there been an unexplained uptick or downswing? If it’s the latter, you need to figure out what caused it. There could be any number of explanations, ranging from a sudden spike in payroll because somebody mistakenly recoded a marketing expense to the wrong category during that period, to an unexpected decrease in spending. And while a decrease in spending sounds good, it won’t work out that way if it happened because your marketing agency’s invoices haven’t been paid due to a glitch. You wouldn’t want your agency to suspend your marketing campaign in the middle of your biggest sales season over a simple miscommunication.
That’s why a monthly review of trending P&L is so critical. It’s a matter of examining the numbers to see if something doesn’t make sense — and then figuring out why. A trained professional can spot those clues and follow up with those all-important insights.
2. Balance sheet review
This one’s similar to the trending P&L. It can reveal problems that tend to sneak up on small-business owners. If you’re paying all of your bills on time but aren’t receiving timely payment from your customers, you can quickly run short of cash. This seems pretty elementary, but you have to watch that cash flow — or hire a professional to do it for you.
3. Actuals vs. budget
Want to know a little secret about small businesses? Most of them operate without a formal budget. That’s one of the things that separates small businesses from larger ones. A major corporation couldn’t function without a budget. And that budget gives them a kind of financial GPS. If they budget $10,000 for a marketing campaign and the marketing department spends $15,000, the accounting department will pick up on that when reviewing the variances between actual and budget.
Those kinds of discrepancies sometimes go unnoticed at small businesses. That’s why it’s important to create at least a rudimentary budget. Even better, create separate budgets for separate departments. That makes it easier to trace the cause of a particular problem. If sales are falling short of projections and the sales department is also running under budget, that could indicate the sales team simply isn’t using all the resources available to them.
4. The right ratio
Financial ratios are a great source of financial insights. But like so many other indicators, they are industry-specific. Inventory turnover ratio, for example, can be an invaluable indicator for a retail outlet but is of little value to a landscaping business.
A great approach for many small businesses is to conduct a profitability analysis. This can be done using a single category or a combination of several: profitability by product, profitability by project, profitability by client, etc. A law firm, for example, might find it makes a higher margin handling divorce settlements than personal injury claims. The firm might then decide to specialize in the former while phasing out the latter.
You can also use these insights to adjust your pricing. Rather than drop personal injury cases, that law firm could pay closer attention to the number of billable hours and charge more when necessary. A lot of businesses go wrong in not realizing they’re overspending or over-delivering on a particular type of product or service.
5. A dashboard
A dashboard is a quick, convenient way to track the numbers that you’ve determined are the most vital to your small business. Talk with your outsourced bookkeeping professional about the key performance indicators that matter most to you, and they can create a dashboard that gives you instant insights into your business. If something seems amiss, you can get to the bottom of it right away.
Happily Ever After
Your financials have an important story to tell you about your small business. By working with an outsourced bookkeeping professional to figure out what the story is, you can create a happy ending.