The high level purpose of business finance is to plan out the proper distribution of your company’s assets. Rules of thumb are great to keep top of mind for keeping your business on track financially.
Keep these 7 rules of thumb on hand to guide your company’s fiscal management:
1. Assess Your Accounting and Financial Tools
Are you using the right software to track expenses, control debt, and project company growth? Make sure the tools you’re using have the features you need, while remaining within budget. The right software should automate a lot of the annoying parts of tracking costs and revenue.
Accounting and finance are closely tied together, so before you revamp your financial management and planning goals, make sure you’re using the right numbers.
2. Determine What KPIs to Track
This can vary business to business, but a few common key performance indicators to track financial health are:
– Net Profit & Net Profit Margin: How much of your revenue is profit?
– Gross Profit Margin: Are you pricing your products/services the right way?
– Amount of Accounts Receivable: How healthy or behind is your cash flow?
3. Calculate Your Sales-to-Expense Ratio on a Monthly Basis
Divide your monthly expenses by gross sales to get your sales-to-expense ratio. This ratio is helpful for estimating future expenses. Fixed expenses are not likely to change very much, but variable costs will fluctuate depending on sales volume.The lower the ratio is, the more profitability this reflects.
4. Follow a System for Accounts Receivable
Many businesses don’t receive payment for their products or services right away, and it’s important to know how quickly you can expect to be paid. A huge number of outstanding payments can destroy your cash flow. Put together a system for tracking down these outstanding payments, and follow it regularly.
5. Don’t Expand Too Quickly
Business growth and hiring new employees is exciting, but don’t make any sudden moves before ensuring that your current growth rate is sustainable. Do you need another employee just yet, or can you make do without one for now? Perhaps you can try using freelancers or outsourcing some tasks. That way, you can support the growth while curbing costs.
6. Create a Sales Forecast
A sales forecast is necessary for proper financial planning and business growth. Check out the 3 most effective methods for projecting sales.
7. Decide Where Your Time is Best Spent
Keeping track of the company finances is not an easy task, and it’s not something you can overlook or make mistakes on. Chances are, your time would be better spent actually running the day-to-day and managing your company than getting into the financial nitty gritty. If that’s the case, be sure to look into options for outsourcing these tasks.
Now, it’s important to remember that ‘rules of thumb’ are not rules to live or die by. Many things depend on your unique business and industry. It’s never a bad idea to hire an outsourced CFO or financial expert for help and further guidance.