Assessing the Financial Health of a Small Business

I recently read an article from entrepreneur.com that described the lack of business cash flow as a “symptom and not a cause of business failure.” I couldn't agree more, and that is why it is absolutely crucial to ensure that you have a clear understanding of your company finances.

Financial Warning Signs

  • Little or No Profit – This can be a difficult symptom to diagnose. Even great businesses have struggled with profitability at some point along the way. If your business consistently relies on outside money and not profit in order to sustain itself, that is a sign of a much larger problem.
  • Slipping Margins – Gross margins (gross profit divided by sales) are an indicator of your business’s ability to manage important expenses. Net margins (net profit divided by sales), is an indicator of profit (a much better indicator than outright profit alone).
  • Profit but No Positive Cash Flow – Your business can be profitable without generating positive cash flow. That seems like an oxymoron, but it’s an issue of liquidity (can your assets be easily/quickly converted into cash).

Financial Stability: How’s your business doing?

It can be difficult to tell if your small business is financially stable… especially if you are unable to calculate or determine the items listed above. If you are struggling to make sense of your books, it may be time to consult with a professional. Your friendly, James Island bookkeeper can help you to better manage company money. DEKE Business Bookkeeping caters to the unique needs of small businesses in the Charleston area. Schedule a complimentary call to learn more.

Source: http://www.entrepreneur.com/article/239730

Determining Profit

Small business owners often adopt an accounting system (or bookkeeping system) for the sole purpose of determining profit. The concept seems pretty simple, but there is much more information that can be gleaned from a good accounting system than just the amount of money coming in. 

It's More than Simple Subtraction

The ability to determine profit starts with the diligent tracking of income and expenses, but an accounting system should provide insights beyond simple subtraction. Business owners should be studying their profit and loss statement to identify ways to increase profits. Which products or services are best sellers? Which customers purchase the most? This is the sort of information that will help to fuel profits in the future.  

Keep in mind that reports can be relatively useless without a point of comparison. Compare profit findings from period to period. Are there any trends? 

Most of us are setting goals, but how can we track the progress? How should company money be spent? Is it a good year to purchase new equipment or take a big business trip? The proper accounting system is crucial to answering these questions. Business owners who possess a firm understanding of profit (the amount, its sources, etc.) are better equipped to manage cash, minimize tax liabilities and achieve sustainable growth. 

In Review: Tips for Determining Profit

  • Diligently track income and expenses.
  • Subtract expenses from income. 
  • Determine the best sources of income (i.e. which products/services are best sellers and which customers are buying the most). 
  • Compare findings to previous periods. Look for trends.  

Need help determining your profit? Submit an inquiry or call (843) 225-6522.