5 small business finance measures you need to know

Getting across these five key financial measures helps put you on the path to business growth (and maybe you’ll sleep a little better too).

1. Cash flow – what’s coming in and going out?

The basic equation: money you’re taking in – operating expenses = cash flow.

It’s a snapshot at any given time, but it’s about more than having money in the till at the end of the week. Cash flow is particularly important when you have staff to pay as payroll waits for no one.

Cash flow can cause big challenges for small business. But don’t panic, plenty of businesses experience cash flow hurdles when they’re new or seasonal, and because income is hard to predict.

Negative cash flow can even be a good thing if it happens because you’re investing in business growth. It’s easily managed with a small business loan, and you can get back on track quick smart.

Improving your cash flow: Think about making it easier for both your customers and suppliers to pay you. Online transactions are simpler for everyone, and your cash is on hand quicker.

2. Profit and loss – how’s your financial health?

A profit and loss statement, or P&L, is statement is similar to a cash flow statement – it shows your operating expenses and your revenue. The difference is, a P&L statement is generally a snapshot over a longer period (like a month or the financial year) and includes things like depreciation, receivables and inventory.

While cash flow can be sporadic, and it’s normal to go through times when things don’t quite add up, a P&L statement digs deeper into the financial performance of your business. If your P&L is in decline month after month, and you make a loss over the year, you need some help.

Improving your P&L: Everything you do as part of your business contributes towards your profit and loss. Not every business makes a profit right away. But if things aren’t adding up, or you’ve hit a plateau, think about getting some professional financial advice from your accountant. They’ll be able to help you put together a financial plan for your business.

3. Accounts Receivable Ageing – who pays on time?

Don’t be put off; it’s not as complicated as it sounds.

Not all customers are created equal. Most cloud accounting software will let you run an Accounts Receivable Ageing (Aged AR) report to see who pays their bills on time and who doesn’t. It gives you a look at the financial health of your customers, and where you’re spending time chasing payments.

If a customer consistently pays late and needs a follow-up for every invoice, weigh up their value. It may mean you prioritise other customers if you’re busy and need to make a choice.

Improving your Aged AR: Check out your payment terms and conditions and think about:

• invoicing in advance or as goods and services are provided
• automating follow-ups for late invoices
• having a clear plan for when and how to action overdue invoices
• offering a small discount for early or cash payment.

Making a few changes creates an opportunity to send the update to all your customers. It can give them a nudge to look at their systems without the awkward conversation.

4. Aged Accounts Payable – are you paying your bills?

Remember when you looked at your aged receivables? It’s frustrating when those customers don’t care how paying late affects you. Well, that’s how others feel if you don’t pay your bills on time. It’s a vicious cycle that can end with you.

If your Accounts Payable (or AP) report shows you’re always paying late, ask yourself ‘why?’. Check it out against your cash flow and forecasted income. Is it a lack of cash or a lack of organisation? Get proactive and plan out your business budget, or you may get a bad name that stunts growth.

Improving your Aged AP: If you can pinpoint times when cash flow might be temporarily tight, think about a friendly cash flow loan to keep your bills paid and your reputation intact.

5. Your salary

There’s nothing wrong with paying yourself a salary as the business owner. It’s the smart way to set your own financial needs as a fixed business cost and stay on a budget. It can also help remind you you’re getting somewhere, and you get the buzz of a regular pay day!

Think you’re not getting a salary already? Take a look at the cash or other personal expenses being paid as part of your business finances and think again.

Prospa tip: Don’t forget your super, no one else is going to pay it for you. Make the most of tax benefits, and you may even have some contributions matched by the Government.

Tell your own business story

The kinds of financial measures mentioned above/here are easy to access through your accounting system. If you’re not sure where to start, talk to your bookkeeper or accountant to get a crash course in running reports and how to review them.

Don’t lose track of the numbers. Stay across them and tell your own business story.