Understand Business Financials
It’s important that any business owners understands the company’s financials. In my experience, 90% of business owners do not have and/or understand the key numbers for their business. A good place to start is measuring your growth, cash flow and your return on investment.
• Growth – Taking a look at your growth in sales. Compare your sales numbers this year to last. If you are up over last year than things are moving in the right direction. Remember that the increase has to be profitable and sustainable.
• Manage your Cash Flow – A company may seem profitable on paper but actually suffer from poor cash flow. When looking at your numbers, keep a few things in mind:
- It is simply smart practice to keep your inventory clean and lean, as low as it can be without sacrificing timely delivery to your customers.
- Take a close look at your payment terms for suppliers.
- Are you enforcing them?
- Do you act quickly when they fall behind?
- Would it benefit you to offer suppliers incentives to pay early?
- Are your overtime wages under control?
- Are you taking advantage of flexible work schedules to possibly reduce some fixed salary costs?
• Return on Investment (return on assets ROA) – A company’s return on investment or assets is its net profit divided by the average value of its assets during a given period of time. This measure shows you how well your company is using its assets to make money.
Calculated by dividing a company’s annual earnings by its total assets, ROA is displayed as a percentage.
The formula for return on assets is:
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