What are the key metrics a small business owner should pay the most attention to, and how often should these numbers be reviewed?
Right now, I'm performing my own accounting for my business, but I am a bit confused. What are the key metrics/ratios I should be analyzing, and how frequently should I analyze them (annually, quarterly, etc.)? Also, at what point should I hire a professional accountant? Is there a specific time that is ideal (in terms of the amount of revenue/profit I am generating) or is it just a matter of personal preference?
The top priority as a small business out of startup should be profit. But profit shouldn't be your measure of success. You#ll need to re-invest a percentage of your profit in growth (advertising) and sustainability (development for the future).
In respect of when to hire an accountant, my suggestion (and I'm not an accountant who'll tell you to get one as soon as possible) would be that when you hit 5 figures a year, a good accountant will save you more than they cost.
Depending upon the sector that your business is in, your Sales etc. should be reviewed on a monthly basis. But a better indicator would be your gross profit percentage. Percentage numbers are always a better indicator of growth or loss. Actual numbers may be misleading, but percentages, will reveal the upward.or downward trend that is in existance.
The only thing that really matters when you are staring out is CASH FLOW. that's the most important metric you need to monitor and you should do it on a daily basis.
As you get going the key metrics to you are going to depend on the nature of your business. if you are selling goods you will want to understand your inventory, what items are moving and which are not, you will want to understand profitability on the different inventory items.
If you are providing a service you will want to know how long it takes you to perform the services and the costs required to perform it.
Customer acquisition costs are an important thing to understand in any business.
You will want to determine what the key drivers of your business are and track those weekly, some of these drivers will be financial metrics like profit and other will be less financial in nature such as how long it takes to close new business.
Monthly you need to definitely need to prepare a P&L, Balance sheet and Cash Flow and other cost or sales information that is critical to your business, if you are not familiar with how to apply this information to your business you need to educate yourself or work with someone that can help you understand what these reports tell you about your business.
With regard to when to hire outside resources, I would suggest you hire a bookkeeper as soon as you can afford to; your time is not best spend entering information into QuickBooks. A bookkeeper, will not be able to be much help with some of the other things described above. Depending on your business and your plans for that business you may need different levels of help in this regard.
If you plan to be a small niche business you likely don't need a lot of help, perhaps quarterly or even annually consult with someone who understands how to the things I describe above. If you are planning a high growth business you should get someone to help you with this soon and will likely need to work with them on a monthly basis.
Also, the resource you want to use for this is not typically going to be a CPA. You will want to look at some type of Controller/CFO Service. The difference being that a CPA's area of expertise is typically in the tax and audit field, whereas a Controller/CFO's area of expertise is in the are of managing the finances of a business and creating usable management information.
These types of services are pretty well established throughout the country and if you are located near an urban or industrial center there should be plenty of local resources. There are a lot of companies that offer this type of service "virtually", I would stay away from those and were with someone locally that can actually come to your office. They will be able to get a better understanding of your business and provided more helpful services.
This is one of those reasons to hire an accountant. But enough of the shameless plugs, The Profit margin and debt to equity ratios are two of the most important for any company, regardless of industry and size. You should also check specific P&L costs/expenses to make sure they are in proper alignment to income. These are the line items which are the biggest cost. Typically cost of goods sold and payroll are the two biggest for most companies, you should make sure that they are as close to in line as possible. Cash flow is important, but if you have other sources of financing for your personal life and/or the business, a small negative cash flow from operations will not kill you, so long as there is growth in the Net Profits. This is one of those things that professional analysis is good for.
A professional accountant, should be willing to work within your budget to provide the services you need. I charge my clients based on how much work needs to be done. a start up might get charged as little as $150 a month whereas larger companies who need more help are charged more. If you are local to the Maryland area, I would be willing to give you a free consultation.
While there are some general KPIs for all businesses, there are typically different KPIs for each industry segment. You can use the industry specific ratios to compare how you are doing. Also, KPIs and metrics used should be based on your specific business' goals.
I'd recommend that before you hire an accountant that you contact your local SCORE chapter and find a financial / accounting mentor. Their service is free and they could provide you some valuable insight on your specific company's needs.
In the meantime, you might want to check out the following resources.
I've had an accountant from day one. I want to spend my time doing what I do well and helping my clients. When it comes to money, I'm a big believer in letting a professional handle it. He tells me what I need to know, when I need to know it and makes sure we are compliant.
As said correctly before by some mates, the CASH FLOW is the issue you should more worry about because if you are able to manage it well, you will save money and your business will last for much time. Those people who said that profits are the best measure, they are completely wrong since some companies shut down with profits because they had liquidity problems that lead the company to bankruptcy.
My advice is to use ratios like:
-Acid test (current cash + customer accounts receivables)/short term liabilities (short term loans + payables). If that ratio is greater than 1, you will be able to afford all your financial obligations.
-Average days to get paid by your clients = (Clients account/VAT in percentage)/Total Sales x 360 days
-Average days to pay your payables = (Payables account/Total non-financial Expenses) x 360 days
Explanation: if average days to get paid is larger than average days you are very not to ask for short run loan.
Another important topic regarding financial statements analysis is how your investments are financed. The short term investments should be financed in the short term and vice versa. But NEVER, a long term investment should be financed in the short term
I personally advice you not to hire an accountant but outsource the service until the company is big enough (maybe the 5th employee should be an accountant)
If you can build up and update a Profit and Loss account as well as the balance sheet every 3 months, that's perfect because you will see the evolution of your business and sales every quarter (the more information, the better). If not, having a P&L account and a balance sheet twice a year is OK.
Hope the information I gave you is useful.
If you have more questions or I didn't replied to them the best way you expected, do not doubt in approaching me
There are some good ideas in this article.
It's a offers a new perspective that will help you to develop your own answers.
Cash flow is critical. You should hire a good CPA as soon as possible, particularly one that is familiar with your type of business. The wisdom you would attain is worth it's weight in gold. You would be more productive investing your time getting clients.