I'm a big believer that numbers tell a unique story. But in business, we don’t want this story to be a mystery or it will probably have a very sad ending . . . for us.
So what’s the story behind the numbers? Ken LaCroix, the CEO and Fractional CFO of Insightful Partners, offers some actionable insights into business financials and how to help your business story have a happy ending.
First, the basics:
“The definition of accounting is looking backwards,” says Ken. “Financials are meant for the outside world. They're there to help the bankers, stakeholders, creditors, and other people that might want to purchase your business to help understand your business and how you relate to other businesses in your space.”
Despite this original design, understanding the narrative of your numbers can help predict the future to some degree of efficacy. What are KPIs small to medium-sized businesses should be putting in place when thinking about their numbers? Ken puts forth five big ones:
Revenue Growth-This is what an outside investor at the end of the day is going to look at: how well can you grow your revenue?
Gross Margin or Gross Profit: How profitable you are with sales. This relates to efficiencies and effectiveness.
Total Return- At the end of the day, what amount of money is being returned to the investors or to the stockholders? To the people that own the business? What does that number look like, and how is it growing or not growing?
Efficiency- Take revenue and divide it by your number of employees. If your sales are going up but your employee count is going up faster, then this indicates a lack of efficiency. Likewise, if it’s going the other way than you’re not leveraging potential opportunity.
Balance Sheet Metric-What funds are available quickly to pay off debts? People often don't quite understand how close to the edge they might be with credit card loans, Accounts Payable, and other loans compared to the receivables (the cash they have on hand). As sales grow, that eats up cash and resources.
At a minimum, a small business should be paying attention to its income statement. How does this month's income look compared to last month's? How does our year-to-date income look compared to last year's?
Technology. Nearly gone are the days of paper-pushing-calculator-number-crunching. Now there is off-the-shelf inexpensive software that anyone can implement that removes the heavy lifting of inputting, storing, and evaluating stored data. This can mean more data, and the more data that you have, the more trends that you can find and better predict the future.
Ken says one of the biggest mistakes’ medium to small-sized businesses make is that while they focus on growth, they are not focused on profitable, sustainable, or even affordable growth. When businesses grow, they consume resources. By definition, if your sales go up, chances are your accounts receivable is going to go up. So if you're not managing those receivables (where all your cash lies), you can grow yourself into insolvency.
Remember, numbers are not just numbers, not just history. Ask yourself: what is the story they are telling you? They are the plot lines in the growth and management story of your business.
To learn more on this topic, tune into the Business Growth Café podcast with Ken LaCroix.