Every small business experiences periodic challenges, ranging from cash flow or staff shortages to new competition or obsolete technology. Not all business owners recognize the signs of more significant troubles below are the things you need to understand for effective financial management.
- The business owner needs to understands how profit is generated. Which products or services are the most profitable, not just the best selling. Can they be divided into primary and secondary streams where one sale depends on the sale of the other? For example, there’s no reason to focus on add-ons like service contracts or product upgrades if the primary or original product isn’t generating enough business.
- The business owner knows the gross margins of major products. It is much easier to make money with an 80 percent gross margin than a 20 percent gross margin. In most service-oriented businesses, gross margins must approach 50 percent to make a healthy bottom line profit.
- The company’s prices are appropriate for the marketplace.
Are they based on historical trends? Or competitors prices? An analysis will reveal if there’s room to charge more. Early on, many small companies charge too little for their products or services, fearing that they will not be able to generate sales unless “everybody” can afford to buy from them.
- The business owner understands the company’s cash flow statement.
Does he/she know exactly where cash comes from and how the cash is spent? How much of the monthly profit reported on the income statement actually gets retained as cash in the business?
- The business owner knows the aging of the company’s Accounts Receivable.
A customer who doesn’t pay on time may not be worthy of keeping as a customer. Know the biggest offenders of late payments, and treat them accordingly (e.g., charge interest fees, limit credit, require partial or full prepayments).
- The company’s offerings are still relevant to its audience
Has the marketplace changed since the company’s products and services were introduced? Are other solutions providers taking away business month after month? Is your audience developing their own products or solutions? If so, it’s necessary to re-evaluate the company’s offerings.
- The business owner is aware of where his/her time is spent
Small business owners need to focus most of their energies on generating revenue — not administrative duties. It’s also a good practice to examine the roles of non-sales employees to be sure there is justification for their positions.
Every year businesses should go through the exercise of evaluating all of the items above so that they truly understand where their business is currently and then they can adjust as required to meet the company goals.
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