The mid-year financial assessment is a common practice among entrepreneurs who have successfully navigated both the ups and downs of small business. They know that the bulwark of accurate accounting measures is validation of wise management decisions and uncovering areas for improvement.
Plunging into an evaluation of financial data doesn’t become a journey through a dark labyrinth when you know where to find the numbers that are crucial to your small business. The key performance indicators to monitor depend on whether your operation relies on increasing sales, maintaining profit margin, having timely collection of accounts receivable, or turning over inventory promptly. Knowing the ratios that measure these factors permits you to make informed decisions throughout the year. And you will avoid being blindsided by circumstances that could have been known earlier by trending ratios.
Reviewing Revenue
Upwardly ramping sales is often a signal victory for keeping the bills paid and enjoying profits. The rate of sales growth is especially vital in a young enterprise. Greater sales volume is needed to fill the available time of the entrepreneur and assure full utilization of other resources. Measuring the sales increase in a recent period – such as a calendar quarter compared to the prior quarter – is the first step.
Next is comparing that rate of increase to the rate measured in earlier periods. Eventually revenue will flat line as all resources and time are utilized at their full capacity. Until then, you’ll want to maintain your growth rate or find out why it has slowed. Later, adding more resources – such as staff – may be advisable to accommodate continued growth. As sales increase, profits should keep pace. Ideally, profits should rise at the same or higher rate than revenue.
Identifying Inventory
Inventory turnover of items acquired for resale is a standard of high quality governance. This often overlooked calculation starts with finding the cost of inventory currently on hand, which appears on the Balance Sheet. That figure is divided by the cost of inventory sold in a recent period, which appears on the Income Statement. The result is inventory turnover. For a clearer picture, multiply inventory turnover by the number of days in the recent period. This yields the number of days worth of inventory you have on hand based on recent sales. Low numbers are best because they represent superior cash management. You want only enough money tied up for inventory as is necessary to meet upcoming sales.
The Finance Writer 