For a lot of business owners, the way they tell whether or not their business is doing is simply by checking their bank account. A lot of money in the account? It’s time for a drink! Little money in the bank account? It’s time for a drink!
Having gone through formal education in accounting myself, I don’t blame most people not wanting to read financial reports – as we weren’t taught how to make preparing and reading financial statements simple. It was the case of the more complicated the better…
Interested in learning how you can make more cash from reading your financial statements? It’s simple if you know where to look:
1. Accounts Receivable. This tells you the amount of money owed to you. In other words, it tells you how much money you have that’s being held by somebody else…
Having good billing and collection systems is important to make sure your customers give you your cash rather than hang on to them. It is also a worthwhile exercise to keep track of how many days on average it takes your customers to pay you.
2. Inventory. This tells you the amount of inventory you have that is not yet sold. In other words, it tells you the amount of cash you have tied up in your stock that’s just sitting there…
Maintaining your inventory at lower levels will ensure that you will free up more cash. Good supply and delivery management is essential here. Tracking the average amount of days your inventory stays unsold will allow you to plan your purchase/production more efficiently.
3. Accounts Payable. This tells you how much money you owe other people.
Making sure that you have good control of how and when money goes out from your business is always good for cash flow. The longer the average time it takes us to pay our bills, the better it will be. Note that we would want to achieve this in a way that will still allow us to strengthen our relationship with our suppliers.
4. Equipment. This tells you how much stuff your business has and what they’re now worth.
Asking the questions “do I really need it or did I want it?” as you go through your list of equipment helps you determine whether or not you suffer from the “Pimp My Ride” syndrome. Too many businesses have more fancy chairs than they do good paying customers. Think necessities rather than luxuries here. Do we have any monthly installment payments that we can cut here?
5. Expenses. This tells us how much you spend each month to run your business, or your monthly cost of doing business.
If your business is your investment, then it would make sense for your to know how much money you are spending each month to generate the level of profits that you’re getting. Find out your “profit drains” and plug the holes here to ensure that more cash is coming in compared to going out. Monitoring how much you spend on Marketing each month compared to the results you’re getting will also allow you to be able to plan your future campaigns more effectively.
6. Revenue. This tells us how much in theory our business is making per month. In other words this tells us how much people have promised to pay us…
Monitoring and adjusting your activities regarding marketing (leads generation and number of transactions), sales (conversion % and average $ sale) will help you drive your revenues up, and in conjunction with your collection policy, will help increase your cash flow.
7. Accuracy. Make sure that your numbers and your reports are accurate.
You won’t know if you’re really winning or losing if the scoreboard is wrong, so make sure that your accountant is capable, has the right tools & support and give you accurate reports by the 5th of each month.
Enjoy the application of this knowledge in your business.
– Coach Marvin –
ActionCOACH South Jakarta business coaches guide businesses in selecting and implementing effective and cost-efficient marketing strategies to boost results with a proven 17-week guarantee. For more information on business coaching, visit www.actioncoachsouthjakarta.com or call 021 2567 5775 .