As a practice manager, you need to monitor and analyze your financial data regularly to identify areas of your business that need improvement. Financial data can help you measure your performance, track your progress, and make informed decisions. Here are some tips on how to use financial data to improve your business.
Your key financial indicators are the metrics that reflect your business goals and objectives. They can vary depending on your industry, size, and strategy, but some common ones are revenue, profit, cash flow, expenses, and profitability ratios. You should track these indicators monthly, quarterly, and annually, and compare them with your budget, forecast, and industry benchmarks. This will help you identify trends, opportunities, and challenges in your business.
Business owners are good at tracking revenue, but not as good at utilizing expense ratios to properly price their products and services to maximize profitability. A good CPA, bookkeeper, or coach can help.
Your income statement reveals your revenue, expenses, and net income for a certain period, allowing you to assess your profitability and efficiency. To analyze your income statement, consider the following aspects: Revenue - how much income did you make from services or products? How did it differ from the prior period? What were the main factors of your revenue growth or decline? Expenses - how much did you spend on operating costs such as salaries, rent, utilities, supplies, marketing and taxes? How did those change from the previous period? What were the main causes of increasing or decreasing expenses? Net income - how much profit did you earn after subtracting expenses from revenue? How did it vary from the prior period? What were the main contributors to your net income growth or decline?
Run your P&L Report as a "Percentage of Revenue" and track your COGS and Gross Profit Margin. This portion of the P&L will do more to unlock additional profit opportunity than just focusing on reducing expenses below the Gross Profit Margin line. Then monitor your top 3-5 expenses and set benchmarks. For example, payroll is usually 20-30% of revenue. Find your sweet spot and don't exceed it as a percentage. It can grow in dollars as long as it tracks with revenue increases. Bottom Line: Measure Percentages, not just dollars and it will be like seeing in color versus black and white.
Your balance sheet shows your assets, liabilities, and equity at a specific point in time. It provides valuable insight into your liquidity, solvency, and financial position. When reviewing your balance sheet, you should consider the resources you own or control such as cash, accounts receivable, inventory, equipment, and investments. Additionally, you should look at the obligations you owe to others including accounts payable, loans, leases, and taxes. Lastly, you should examine the difference between your assets and liabilities which is the value of your ownership in the business. By looking at these aspects of your balance sheet, you can determine how they have changed from the previous period as well as what events affected them such as net income, dividends, or capital injections.
Business owners seldom look at their balance sheet and the #1 culprit is because it's not accurate. A professional bookkeeper ...not someone who isn't trained (sorry mom, sibling, or office admin). Once you commit to timely and accurate data, you can begin to manage your business by the numbers. The balance sheet is like a fortune-telling machine as it can accurately predict your working capital needs (Hint: look at the equity section...a negative number tells you how much additional capital you need to run and grow your business). Analyze your A/R turnover ratio and you'll be able to unlock cash flow stuck in your biz. As a rule of thumb, 10% of your A/R represents low hanging fruit, aka additional cash flow.
Your cash flow statement provides insight into your cash inflows and outflows from operating, investing, and financing activities for a specific period. It is important to monitor your cash flow statement by looking at the following aspects: operating cash flow, investing cash flow, and financing cash flow. Specifically, consider how much cash was generated or used from core business activities, how much was spent or received from investing activities, and how much was raised or repaid from financing activities. Additionally, compare the current period's results to the previous period's to identify changes and understand the main factors that influenced the results. Doing so will help you better understand your cash position and cash needs.
I find the cash flow statement to be useless for most business owners. Even bankers don't really use them beyond the basics. This is a report written by accountants for accountants. Put this report aside until you've mastered your P&L and Balance Sheet.
Analyzing your financial data can help you identify areas of your business that need improvement and develop action plans to address them. For example, you might consider increasing revenue through customer expansion, offering new services or products, or raising prices. Additionally, you could reduce expenses by negotiating better deals with suppliers, optimizing processes, or outsourcing tasks. To improve cash flow, speed up collections, manage inventory, or secure a line of credit. Furthermore, you can enhance profitability by improving quality, customer satisfaction, or efficiency. By using financial data to identify areas of your business that need improvement, you can make better decisions and optimize performance to achieve your goals.
Becoming numbers confident directly translates to better cash flow, higher profits, and higher business value. With timely and accurate data, you will make better decisions.