By Amber Wilson, Business Coach, West Virginia Small Business Development Center
Are you overlooking important financial information each month?
If you’re a small business owner, you are probably aware of the difficulties accounting can bring to you and your company. Many of you are so busy with day-to-day operations that you lack proper time to regularly review your business’s financial statements.
We know it is far from easy to own and operate a small business, but it’s imperative that you’re having regular conversations with a financial advisor or accountant monthly about the status of your financials.
Focus on these five areas when reviewing your monthly financials:
- Trends
- Expense Control
- Debt to Equity
- EBITDA
- Misfinancing
Trends: Maintain a basic understanding of the trends within your business. Are your sales currently up or down? What about your profits and expenses? Take note of your findings and compare the results to other months or quarters. Review the information and take time to understand why these trends are happening. It’s also important to look at industry averages and how they compare to your business.
Expense Control: One area that usually causes your operating expenses to increase is your inventory costs. See if the cost of your product has increased or if the vendor who provides the material has changed hands. Look at the percentages of expenses to sales, and compare the two. It’s always a good rule of thumb that if you have less money to spend, you should spend less money.
Debt to Equity (D/E) Ratio: This ratio is an element of risk. Debt-to-equity ratio is how much money a bank will lend you divided by the amount of funds contributed by the owners plus retained earnings. This should be 2.5 or lower (the sweet spot is 1.25-1.45). Price Waterhouse states that 75% of all small businesses will change hands in the next seven years. Preparing your business for an exit strategy is wise, and keeping the debt to equity ratio in line allows for an easier and more profitable sale.
EBITDA: Be sure your financial plan is based on what you can afford. EBITDA or Earnings Before Interest Paid, Taxes Paid, Depreciation Paid, Amortization Paid, gives business owners the ability to see a clear picture of operations by removing expenses that misrepresent the performance of the company.
Mis-financing: Yes or no? Are your financed assets based on the term of the asset? The rule stands that the life of the loan should match the length of the asset.
Understanding these five areas and reviewing them frequently with a financial advisor or accountant can help you assess your business’s current financial status and provide the ability to properly manage, finance, and ultimately exit your business someday with a profit.