When it comes to your company accounts, you know you can rely on us to keep everything running smoothly, but this doesn’t mean you should be completely unaware of your numbers.
If you don’t have an accountant and you’re doing things yourself, you may be wondering where exactly you should start.
As a business owner, it’s important to keep an eye on and be aware of several financial KPIs.
Wondering what they are? Steven and Jonny have kindly pulled together a list of 6 financial KPIs that you need to be aware of and most importantly, why and what they mean to you.
1. Your cash flow forecast
Understanding your businesses cash flow is vital for success, especially for start-up companies.
Normally a business cash flow forecast would be done at the end of a year’s trading for the year ahead and once you have some figures to refer to, but if you’re a new company it’s a good idea to create a forecast before you’re properly up and running.
Cash flow forecasting means predicting how much money you’ll need and have available in order to continue trading. You estimate all of the money you’ll make during the forecast period and all of the costs you’ll incur.
Regular forecasting, on a month-by-month basis for example, will help you understand when you could potentially run low on cash.
To make an initial cash flow forecast:
- Use your market research and business plan to predict the revenue you’ll generate with your product or service.
- Predict your profit and loss based upon your predicted sales vs the day-to-day running of your business. Include all of your costs to run your business such as: wages, utility bills and insurance.
- Pull all of this data into an overall forecast which covers your predicted sales and losses.
2. Know your balance sheet
This one is really important as a good balance sheet should clearly give you an insight into your company’s current assets and liabilities. If you’re just starting out, it’s best you review and update your balance sheet on a regular basis, as this will help you keep an eye on your overall financial position.
Your assets are the economic resources belonging to your business. And could include:
- Money in an actual cash register, safe or bank account, Stripe or PayPal
- Items such as property, fixtures and furniture, equipment, motor vehicles and stock
- Money owed to you by your customers
Your liabilities could include:
- Bank loans
- Creditors (money owed to suppliers of goods and services.)
This may seem like a lot of numbers to be keeping up to date with, but if you keep track from the start, it shouldn’t be too daunting.
3. Your business burn rate
Your businesses burn rate is how much your business spends over a certain period of time.
When you’re just starting out, it’s best to assess your burn rate on regular, monthly basis.
To calculate your burn rate, you need to know the total amount of cash you had at the start of the month (again, refer to your balance sheet and keep track!) taken away from the total amount of cash you have at the end of the month.
4. Your business runway
For all businesses, but even more so for start-ups, this is a really important figure. Your business runway is the amount of time you can effectively run your business before you’ll run out of money or go bust.
If you’re a start-up, you’ll have a limited amount of cash that you can spend. Sometimes start-ups don’t realise how quickly the cash will run out or how easily it’s spent.
To work out your business runway, you need to be aware of your current cash position and your current monthly burn rate.
To calculate your business runway, you need to divide your current cash position by your monthly burn rate. This shouldn’t be too difficult to work out if you have effective balance sheets and are aware of your finances!
5. Your debtor Days
Your businesses debtor days are the average number of days taken for you to collect payment from your customers/clients.
Think of this as the average time it takes your business to get paid and remember that not all of your sales are instant – you may be awaiting payment in the form of invoices and they don’t always arrive on time.
Being aware of the average number of days it takes you to get paid, helps you keep an eye on your cashflow and what you can afford to spend each month.
If you have a high number of debtor days, this means that your business has less cash available to use for the rest of the month.
Debtor days are something to keep a close eye on and manage – It’s always good to assess if you could receive a payment quicker.
6. Your creditor Days
Creditor days are the average number of days your business takes to pay suppliers.
Be aware of how quickly you and your business pay out for services and/or products. Many start-ups can fail due to an imbalanced creditor vs debtor day ratio.
If you pay out all of your money at the start of a month, but you’re awaiting payment from your customers for another week, money’s going to be tight!
In an ideal world, all payments in and out would be made instantly, but this isn’t the case so it’s beneficial for you to keep an eye on things.