Home Business Magazine August 2012 : Page 44
CRITICAL MONEY CORNER Numbers , CRITICAL Trends By Wells Fargo Bank Small Business Center Knowing your critical numbers and tracking helps you set goals and control the core issues in your business. Track Financial Numbers that Will Keep You Out of a Cash Crunch Weakness — This is a number moving in the wrong direction or not moving at all. For example, sales staying at breakeven, low return on assets, or poor inventory accuracy. Moving those weak numbers forward means eliminating weakness. Opportunity — Can you sell more by increasing speed-to-market? Can you land a key client by reducing defect rates? Can you reduce your own prices by increasing operating efficiency? In this case, operational shifts translate into opportunity. The scenarios above can help you develop an objective, or objectives, based on the numbers you need to track. But setting any goal also means watching associated numbers. If, for example, you want to increase sales, it will affect other numbers as well. A 10% sales increase (sales volume) may mean increases in cost of goods sold (increased productivity required to meet sales needs), an uptick in overall labor costs if you need to add staff even on a project basis, and greater inventory turnover. T he one thing you need as a small business owner is likely the one thing that’s toughest to come by: predictability. Typically, according to the National Federation of Independent Business, only about 5% of business owners spend most of their time on finances. When you’re trying to grow, you’re focused on sales and just keeping afloat, but if you can track your trends using a few key numbers or metrics, you can look at historical trends in context and, to some degree, predict certain life-cycle events. “Most people who start businesses are not experts in finance,” says Len Pytlak, CPA. “You may not be an expert, but you can determine the numbers that make a difference for your business and use them to make it more predictable.” For any company, the numbers that matter to you depend on what you do and how you do it. They’re also associated with how your business is doing at any given time. John Case, an Inc. Senior Writer who coined the phrase “Open-Book Management” in his book of the same name, defines numbers-as-drivers-based scenarios as follows: cash is coming in and if you’ll be able to pay your bills. You have to pay your rent and bills whether you get paid or not. The older a receivable is, the harder it is to collect on, so I see that as a vital number.” To get comfortable with the key numbers, Pytlak suggests taking them on one at a time until you’re comfortable using them. “Start with A/R aging and then move into cash flow, inventory controls, cost of goods sold, and other metrics,” he advises. “Don’t be shy about working with your accountant or financial advisor to get help working with the numbers that are most important to your business. Once you understand those numbers and how they affect your business, and begin tracking them, you can begin to see the peaks and valleys in your business.” DETERMINING YOUR CRITICAL NUMBERS TRACKING THE TRENDS Seeing those trends, Pytlak says, is what leads to the predictability you want. You’ll know more about when sales are slower and when you might have a need for a credit line. Or you might get an opportunity for a bulk buy on widgets. If you know you only sell about five a month and the deal is for 100, than it might not be as good deal as it looks, since you’ll have inventory on hand for more than a year. “Once you begin tracking the trends, it becomes an easier exercise,” observes Pytlak. “You find you have the lead time to make adjustments and that you can do it with greater ease. Knowing your critical numbers and tracking helps you set goals and control the core issues in your business. Wells Fargo Bank, N.A. All rights reserved. Member FDIC. For more information visit www.wellsfargo.com and click the Small Business tab TAKING ON KEY NUMBERS ONE AT A TIME While the numbers you need to watch will be geared to your business’ specific situation, and it can seem complex, Pytlak does note that there is one common place to start. “Most businesses don’t even track accounts receivable (A/R),” he says. “You need to have a solid budget in place and keep your eye on the cash flow ball, but A/R is a great baseline number to start with. Looking at A/R aging tells you when Crisis — In a struggling business, your critical number is related to survival. You need to monitor cash in the bank, reduce debt, and/or increase sales. Basic — This is a number that needs to be at a specific level each year, like product output or revenue per labor hour. If you can track your trends using a few key numbers or metrics, you can look at historical trends in context and, to some degree, predict certain life-cycle events. “ ” For more information visit www. homebusinessmag.com and click the Money >> Money Management Channel. 44 Home Business ® | July/August 2012 www. homebusinessmag.com
Critical Numbers, Critical Trends.
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