Your passion may have led you into business, but tracking cash flow and other key numbers will help keep your company up and running.
By DARREN DAHL
Passion drives some people to start a business: They love to make or do something so much they want to turn it into a living.
But starting a small company based on a passion and managing the dollars and cents needed to make it a success are two different things.
“Small-business people we work with tell us all the time that they have no idea about anything to do with the numbers,” says Matt Fargo, a partner at Boulder, Colorado accounting firm Kurtz Fargo LLP and a mentor expert at the Boulder-based Boomtown startup accelerator.
If you want to run a successful company, though, you can’t ignore the numbers.
Regardless of what kind of company it is, you have to generate enough cash to buy supplies, pay for other expenses, and if you have employees, meet payroll and associated labor costs. That means maintaining a positive cash flow, consistently bringing in more revenue from sales than what’s going out for expenses. “Cash flow is the lifeblood of small business,” Fargo says.
In addition to cash flow, companies use other sources of information to determine how well they’re doing, including income statements, equity, debt and balance sheets.
Small businesses can track how they’re doing by following key performance indicators (KPIs) such as inventory turns, or the number of times inventory is sold or used in a month, year or other time period. Other KPIs can include:
– Revenue growth
– Customer retention, turnover and complaints
– Market share and growth rate
– Cost per lead and conversion rate
– Customer online engagement level
– Order fulfillment cycle time
– Revenue per employee
To keep tabs on cash flow, KPIs and other numbers, small businesses should at a minimum keep a good set of accounting records, including financial transactions and a balance sheet, and check them every month. Company owners can accomplish the same thing by using small-business accounting software such as QuickBooks or Xero, or hiring a bookkeeper to help manage the process for them, Fargo says.
It’s not enough to delegate tracking numbers to a third party, he cautions.
“The biggest mistake small businesses make is waiting until the end of the year to look at their books,” Fargo says. “You need to regularly monitor cash inputs and outputs. Smart business owners identify key performance indicators, and watch them rigorously.”
Small Business Finance 101
Fargo coaches entrepreneurs about finance as a mentor at Boulder’s Boomtown startup accelerator, where his lessons helped two companies in the fall 2014 class, Bitsbox and Kickfurther.
Bitsbox co-founders Scott Lininger and Aidan Chopra spent a lot of their time at the accelerator working out the concept for their startup, a mail-order kit that helps kids to learn to code. They didn’t spend much of that time thinking about expenses or learning about small-business finance. As the startup expands, though, they’re leaning on advice from Fargo and other Boomtown mentors, including making sure expenses don’t outpace revenue.
Kickfurther co-founder Sean De Clercq understood finance basics from a previous corporate job. Still, he found it challenging to make time to manage expenses and set up budgets at his new company, which seeks to use crowdfunding to help small businesses finance inventory. “You have to prioritize your time when you’re running a startup,” he says. As Kickfurther starts looking for investor financing, De Clercq plans to hire an accountant to help him apply more rigorous bookkeeping standards to the company.
Stay on Top of the Numbers
Here are other tips from small businesses who got their finances under control.
1. Use a spreadsheet.
If you’re intimidated by accounting systems, use Microsoft Excel or a similar spreadsheet to track cash flow and other numbers, says Kim Ramirez, co-founder of Philadelphia-based Sixty Vocab, a foreign language learning game. Manage a spreadsheet like a checkbook, entering revenues, expense receipts and other disbursements, says Ramirez, who was a certified public accountant and senior finance executive before helping start her business.
2. Look at trends.
Beyond tracking weekly figures, look at monthly and annual trends that could help predict opportunities and challenges. Ramirez pays close attention to revenue, the price of goods or services sold multiplied by how much she sells. Keeping track of both price and volume helps a business make decisions proactively instead of reacting to issues after the fact, she says.
3. Hire help.
If tracking revenue, expenses, inventory turns or other numbers are more than you can wrap your head around, hire a bookkeeper, CPA or financial consultant to walk you through it. “I used to feel overwhelmed every time I looked at a financial report,” says Romy Taormina, chief executive and co-founder of Psi Bands, a Pacific Grove, California maker of anti-nausea devices. Eventually, she adjusted her thinking and now considers numbers her “friends.”
Taormina’s bookkeeper taught her to read financial reports and extract key information that she could apply to real-world scenarios. For example, if she spends X on a marketing promotion, what additional revenue would her business need to bring in to realize a return on the investment? “If you only get X percent back, then you need to think about whether to re-invest in that same marketing program,” Taormina says. “The financials can help to guide those kinds of decisions.”
4. Take notes.
At the end of each quarter, take notes about key changes that impact your numbers, good and bad, Taormina says. She uses a Word document to track changes such as if the cost of goods sold increased during a quarter because a higher minimum wage law took effect, or when a tax exemption on packaging materials expires. When she meets with her bank, board or potential investors, she refers to the notes to paint a more complete picture of the company’s key numbers and why they changed over time. “Financials alone don’t always tell the full story,” she says.