Small Business Week and Money: 6 Steps for Assessing the Financial Health of Your Small Business

By at 30 April, 2018, 1:42 pm

By Kristie Arslan-

As a business owner, it is easy to get mired down in the day to day operations of managing your business.  However, the more information you have about your bottom line, the better you will be able to make spending and staffing decisions as well as plan for growth.  Set aside some time every month to assess the financial health of your business.

Here is a list of key items you should review:

1.) Financial Management

The first step to assessing your business’s financial health is ensuring you have the systems and staff in place to manage your finances.  If you are managing your business finances on your own, make certain you have software tools and accounting systems in place to track all your revenue & expenses and prepare financial statements.

Three financial statements you should review monthly include:

● Profit & Loss Statement (also known as an Income Statement)

● Balance Sheet

● Cash Flow Statement

If you utilize a bookkeeper or accountant, or have someone on staff with these skill sets, make sure they are providing you with the above statements and walk you through the numbers every month, including highlighting any trends.   Also, you should still have access to all of your financial data when you utilize outside help to manage your finances.  Make certain you are provided access to any system or software in use.

2.) Monitoring Revenue

Your profit & loss statement and cash flow statement will help you keep a watchful eye on income and cash flow.  Questions you want to be able to answer include:

● Did we meet our revenue target this month?

● Do we have sufficient cash flow to meet all monthly business expenses? Are we breaking even or showing a profit?

● Do we see a growth trend month over month?

If you are in the early stages of your business, you will likely be paying off startup expenses and may be carrying debt which may show negative cashflow or net income, but the goal is to be moving in the right direction towards profitability.

If you are not meeting revenue goals, it is time to look at your marketing strategy and your expenses (inventory, labor, etc.) to adjust your approach towards a positive trajectory.

3.) Tracking Expenses

Monitoring your expenses is equally important to revenue generation.  You can be meeting your revenue goals every month and have steady growth, but still only be breaking even or possibly be under water in terms of net income if you are not watching your expenses.

Here is what you need to be watching out for:

● Are your overhead expenses (expenses not tied to a particular project or product) consistent month over month? If not, find out what is causing the fluctuations in overhead expenses.

● Are your expenses escalating beyond your budget? Look at each expense category to figure out where you can cut back, starting with those that don’t directly contribute to the bottom line.

● Are you getting the best price on supplies and inventory? It is important to not only monitor your expenses, but to price shop on a quarterly or bi-annually basis to make certain you’re working with vendors that are give you the best prices.

● Are you managing labor costs to ensure effectiveness and efficiency? This is especially important for retail or restaurant/food businesses requiring a large number of staff.

In the preparation of your financial statements, work with your bookkeeper to have a clear breakdown of the important expense categories for your business to allow you to monitor monthly what you are spending your money on and see trends over time.

4.) Inventory Management

Inventory management ensures you maintain the right quantity of your best-selling products to help you maximize profit.  When done effectively, inventory management can help businesses avoid spoilage (depending on your product type) and spending too much money on stock that’s just sitting around.  Key components to smart inventory management:

● Ensure you have the technology tools to track your inventory and your sales properly to collect the data you need to help with inventory management and forecasting.

● Continuously review and improve your forecasting. Using the data in your point of sale system or inventory management software to track what items are selling and when. Also factor in marketing efforts and promotions. This will begin to help you forecast your inventory needs.

● Sell goods in the order in which they were purchased or made, known as the first-in, first-out system. This is critical for businesses with perishable products and helps you cycle through your inventory properly.

● Monitor your stock on a regular basis. Make certain you are physically reviewing the supplies you have in stock to ensure everything is accounted for.  This is a great opportunity to see what items are not selling and adjust your purchasing.

Any business with inventory will also need to monitor cost of goods sold (COGS), which is the costs for creating a product or acquiring items for sale. Tracking COGS is mandatory for tax reporting purposes. But it’s also essential to the computation of gross profits.  Your income statement should list line items for cost of goods sold.

5.) Keeping a Watchful Eye on Debt Levels

Debt is a critical component of any new or growing business.  As a business owner, don’t fear debt, especially if you are leveraging debt to take advantage of growth opportunities for your business.  However, be sure to keep an eye on your debt levels to make certain you able to comfortably make debt repayments and still show growth/profit monthly.

Also, be mindful on the types of debt you are carrying.  Access to capital can be struggle for most businesses and traditional lending institutions aren’t always helpful.  Yet, using high interest debt options like credit cards are helpful for smaller, daily expenses, but using them to fund growth can put you in an uncomfortable financial position.   If you need working capital for your business or are looking to fund your growth, investigate all your financing options and note interest rates as well as repayment terms.

6.) Measuring Customer Satisfaction & Retention

Happy customers and clients mean repeat business which helps boost your bottom line.  Vital to any business is customer communication and getting feedback about your services and products to help you improve your processes.

Technology can help you optimize your connections with customers and monitor feedback. More specifically, a customer relations management (CRM) system can be used to follow up on leads, close sales, promote your products & services, and track customer feedback.

Encourage your customers to share their feedback and ensure you have a quick response procedure in place for both complaints and positive feedback so that your customers know that you value them.


Kristie Arslan is SBE Council’s Entrepreneur-in-Residence and the co-owner of Popped! Republic Gourmet Popcorn in Alexandria, VA.

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