Metrics to Monitor
According to the 2014 Small Business Success Study, many small business owners cite "making enough money to have a comfortable lifestyle" and "making a lot of money" as highly important to defining success. Even though generating a profit is ultimately what it’s all about, your business will need to stay afloat through the rough times before you can enjoy the rewards of success. Keeping a close eye on your cash flow can help keep your business out of financial trouble. It involves more than just looking at your business’s bank account and your profit and loss statement. As the business owner, there are a number of important items you can monitor regularly to keep a pulse on your company's cash flow health. Review them closely each month, or even weekly if you can. This way, you are more likely to spot problems early and have the time you need to resolve them before they become major issues.
Some key metrics you should regularly monitor include:
Bank balances. Cash in the bank is important, but it is just one of numerous components to consider when looking at the full flow of cash: from paying for raw items, to producing them, to hiring staff to sell them, to invoicing, to collecting on those invoices. Regularly monitor and understand the transactions that comprise your bank balances.
Sales. Sales is only the beginning of the process of generating cash flow, but obviously without it, you won’t have any cash to receive. If your cash flow is in good shape, you won’t need to focus on it as much, and you’ll be able to spend more time generating sales income.
Receivables. Ideally, you should keep your accounts receivable down to the lowest level possible. One goal is to have next to no receivables beyond 30 days of billing. Encourage clients to pay quickly. Almost as important is to know with relative certainty or reliability when you can expect to be paid by each client.
Inventories. Keep only enough—and no excess—inventory on hand. This could require very close monitoring to establish reliable or repeatable and somewhat predictable sales patterns to help you keep inventory at a realistic level.
Payables. Pay close attention to what you owe. If you pay your bills sooner than you need to, you might risk leaving your business short of cash. However, paying too late could result in penalties and possibly hurt your relationship with vendors.
Credit terms. Limit the amount of time you allow your customers to pay for the goods and services you sell them. Be cautious about extending credit without thoroughly checking a new customer’s credit history.