Making financial decisions for your business should never be a shot in the dark. Accounting entails collecting, tracking and compiling metrics that inform decisions from an educated and calculated standpoint. Accounting metrics can be powerful predictors for your business’s viability several months, or years, down the line. Investors are also in constant need of numbers to ascertain how valuable a potential investment will be to them, so it’s in your best interest to have them ready. Here are some basic metrics that provide important insight on your company’s financial profile.
This refers to a company’s ability to, at a point in time, pay its liability. It’s calculated by adding cash, accounts receivable, and marketable securities and dividing it by its liabilities, which are essentially it’s debts. This is also referred to as the “acid test” ratio. While simple in concept, this number is a powerful indicator of a company’s risk and ability, in the short term, to pay its debt. The lower its ability (i.e., the lower the ratio), the heavier its liability burdens.
This one is also pretty straight forward. The margin what you have left over when you sell your goods, subtracted from what it cost to make those good. What’s important, however, is what’s embedded in those two figures. To get an accurate sense of your margins, you need to make sure your “cost” analysis includes things like the development, delivery and marketing that went into selling that product.
A lot goes into creating a product or service beyond the immediate materials and labor that goes into creating it. A product may have needed a few rounds of develop to make it ready for consumers. A writer may have been hired to create marketing content promoting your service. A truck had to be hired to deliver the product, or the delivery was outsourced to USPS. In either situation, these costs have to incorporated into an analysis to get a true idea of what you have left over at the end of the day.
This one measures, on average, how long it takes for you to collect your debts. The longer your average collection time, the higher the risk that you won’t have enough assets available to cover your debts, which can create problems down the line (overdue fees, a low quick ratio, stalled development projects). Once you have calculated an average, you can compare it with the past, and benchmark future performance. You can also look at individual clients and see how they are comparing against other accounts. This can help drive decision and conversations that you have going forward.
Good numbers start with good accounting
As you probably noticed, a lot of these numbers entail several other figures within them, such as how margins entail distribution costs and sales revenue. This means creating these analyses entails meticulous and ongoing data collection. Today’s technology takes a lot of the brunt work out of accounting. Accountants today use powerful software like Quickbooks to automate a great deal of their data collection, and focus more on relevant analyses and informed decisions. For that reason, it’s important to integrate an accounting process into your business from the very beginning.