Watch Your Numbers!

Barbara Weltman continues to be a favored source of information when it comes to running a small business. The original title of this post by Barbara was "It's Your Numbers, Stupid!"...I decided to call it "Watch Your Numbers" since it's Friday. My little way of taking it easy on you after a busy week 🙂

To read more of Barbara's advice go to barbaraweltman.com

It's axiomatic that you can't run a business without monitoring and understanding your numbers. Using a financial professional, such as a CPA, is great, but the buck stops with you. By the time you talk to your advisor, things can already be bad. You have to have a firm grip on your financials. Here are three key numbers you need to know.

1. Accounts receivable
These are the funds you're owed for the goods and services you've sold. As I have said many times, accounts receivable are not like fine wine; they don't get better with age. Once receivables are older than 120 days, you only have a 50% chance of collection. You've got to stay on top of aging receivables and put sound collection policies in place.

The number to watch: 30 days (you can set any number you prefer, such as 10 days or 45 days).

Once you reach your number, start special collection efforts, which can include:

• Making a personal call to the customer to discuss the matter. Where possible, have the customer put the outstanding amount on a credit card, so you get your money immediately (the customer then deals with the credit card payment on his own terms).
• Turning over collections to a collection professional (a collection agency or an attorney). This action ensures that you won't get 100% what you're owed because you'll have to pay a fee to the collector. However, it will help you settle the matter and close your books on an outstanding receivable.

2. Expenses
It's simple math that if the costs of operating of your business outstrip the revenue you're bringing in, you'll be out of business in no time.

The number to watch: Profit margin (this number varies with industries, and even by product type).

Monitor your income statement (profit and loss statement) regularly to make sure expenses are not growing more than revenues. Cut expenses if they are getting too large to handle, which may be easier said than done. However, in trimming your budget, recognize that no expenditure is sacred. Shrink your expenses and your bottom line will grow.

An interesting resource is a General Accountability Office study from a few years ago, which shows what sole proprietors spent their money on.

3. Debt
Debt isn't a bad thing, until the cost of carrying it can kill you. The U.S. government found out too late that interest payments could become too expensive (interest payments on the $14.5 trillion of U.S. debt now account for more than 20% of federal revenues). Determine how much debt your company can afford to carry before you take on any more obligations, even if debt would help to finance business growth.

The number to watch: Operating income of no less than twice the amount needed to cover principal and interest payments.

A good resource on the topic is this article from Dun & Bradstreet.

Final word
These are not the only key numbers. Your cash flow and break-even points are also important to monitor diligently. Work closely with your financial advisor to better understand your numbers and to implement the review process to be used for staying on top of things.

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