Here’s how calculating the five financial indicators helps you plan and grow your business. And here’s what happens if an entrepreneur overlooks them.
Most entrepreneurs think of revenue as the money received on the account or in the cash register during a certain period of time, although in fact this indicator reflects the financial result of the company’s obligations to the customer. To put it simply, sales or business turnover.
The customer places the order and transfers the prepayment. The supplier delivers the goods and, if all is well with them, receives the full amount within two weeks. But this is just an agreement on a settlement scheme.
Revenue can be accounted for when there are documents confirming that the right to the goods has been fully transferred to the buyer. For example, if the customer may return products of improper quality within two weeks, the money from the delivery can be accounted for after the end of the warranty period, and not at the time of payment.
The easiest way to understand the state of the business is to monitor sales regularly. In the retail or restaurant business, it’s useful to monitor this indicator hourly to check the effectiveness of the team.
Monitoring revenues must be done the same way you use a strategy while betting via 22Bet, meaning you have to do this properly. For analysis, the indicator can be broken down into two: the number of customers and the average bill. This will help you understand what affects the growth or decline in sales. Increased revenue and the average receipt, it means you can sell more expensive products. If the proceeds declined and the number of customers decreased, it’s time to run ads and attract a new audience.
Profit isn’t the money in the checking account, but the difference between revenue and current expenses of the company. After all, from the money coming into the account, you have to pay rent, pay debts, and purchase goods. Some expenses, such as employee salaries, may have already been calculated but not yet paid – the money remains in the account, but in fact no longer belongs to the company.
It’s useful to count profits and plan them, especially if they’re not yet available. When a company is just starting to develop, its expenses are always significantly higher than its income. This is called a planned loss. The business simply can’t cover all of the costs for equipment, purchasing, promotion, training, and hiring staff in one day. This will take several months.
To understand when the company will be in the black, you need to build a financial model of business development. It should clearly spell out for how long a loss is expected, when the company reaches the break-even point, and when it earns its first money.
It’s important not only to constantly monitor changes in the profitability of the business but also to plan profits according to future expenses. If revenue is growing, check to see if you have to spend more to keep the company running and if profits are decreasing.
Net Cash Flow
Net cash flow is the difference between all receipts and expenditures of funds over a period of time. With this indicator, it is clear whether the company is making money or, on the contrary, “draining”. Cash flow is more important for investors than profit, because it shows the real financial state of the company.
At the same time, a negative cash flow does not always indicate a crisis. For example, it can happen during a company’s restructuring period, when more funds are needed than during normal operations.
If you don’t keep track of cash flow and don’t do planning, you run the risk of cash gaps – situations where there isn’t enough money to pay off current obligations. For example, the money for the goods will come in a week, but the rent needs to be paid today.
Competent cash flow management makes it possible to understand how much money is left to meet obligations to counter parties, how much – for the development of the company, and how much can be paid out as dividends. So in the event of a shortage of funds, there will be time to find resources or to negotiate with counterparties: ask customers to pay bills early, get extra deferrals from suppliers, or attract a loan.