You need to take calculated risks for business expansion and those calculated risks can only be taken after getting your numbers right.
Know Your Balance Sheet
The term Balance Sheet generally conjures up an image of a large sheet filled with formidable numbers. However, at a basic level, the balance sheet reflects the total worth of a business. The total worth of the business is the difference between your assets and liabilities.
Assets can be categorized into current assets (anything that is convertible into cash within 12 months) and fixed assets (property, equipment). Similarly, liabilities are also categorized into current liabilities (short term inventories, salary) and long term liabilities (loans and mortgages).
If you can categorize your assets and liabilities correctly to find out the gross net worth of your business, you are on the track of achieving good financial control.
Understand your Profit & Loss Statement
Use ready made spreadsheets for maintaining Profit and Loss statements or check out any good accounting book. Some essential columns in your P&L statement are Total sales, Gross Profit, Cost of Sales, Owners Contribution, Owners wages/Directors salary, Taxes, Supplies and Advertising and marketing costs.
Other features to keep a record of are miscellaneous expenses, depreciation, Interest values, Insurance amount, rents, Licenses and mortgage/loan amounts. All these factors will help you in calculating your net profit/loss statement.
Correct Projections of Cash Flows
Cash flows are a summary of cash inflow versus cash outflow. Cash flow statements are the backbone of the financial health of your business. If you are operating a small business mainly in cash then it is very important for you to know from what source your money is coming and similarly where you are investing.
Cash inflows comprise of cash sales values, paid receivables and interest accrued. Cash outflows are rent, salary, tax expense, miscellaneous expenses and loan repayment. Now you know your total expenses in figures and also the opening balance.
The difference between the two would give you the closing balance. This difference would determine whether you are running your business at a loss or you are making profit.
Calculate your Ratios
Calculating relevant financial ratios will help you in making investment decisions for your business. Some common types of ratios to look out for are as follows.
Measure the amount of cash that is available to you to cover ready with the Liquidity ratio. Maintaining strong liquidity ratios will ensure that your business is agile enough to handle unexpected costs or make quick investments.
Profitability ratio will help you in calculating profitability, return on your assets and sales profit margin. Weak numbers can then be analyzed for further improvement. How efficiently you are running your business is indicated by your efficiency ratios. Credit sales and inventory turnover return on assets are tracked by efficiency ratios.