Are you always struggling with cash flow? Is it often a surprise to you? These could be indications of a bigger challenge in your small business. So how do you detect the early warning signs of financial trouble in your small business? First, most business owners don’t keep current monthly financial accounting records. Then even if you have them, you are not using the financial statements to make business decisions.
Every financial statement tells a story so let’s look at a few key indicators:
Accounts Receivable Aging. How many days of sales are you carrying in accounts receivable? To get this number, just take your annual sales and divide it by 365 to see your average sales per day. Compare that to your accounts receivable to see how many days you carry.
When the number of day sales in accounts receivable goes up, your cash will go down because customers are using your money for longer periods of time. I recently had a customer whose accounts receivable jumped by about 20 days when they switched accounting systems and no one noticed it. So it’s important to always be monitoring your account.
Compare Sales and Expenses to the Same Period Last Year. There will always be differences, but look to spot large variances that tell you something has changed.
Day Sales in Inventory. Just like receivables, you can look at your total cost of materials sold in a year and determine how many days of inventory you have on hand. When you add new product lines or increase stock levels in inventory, it eats up your operating cash.
Rapid Sales Growth That Can Put You Out of Business. When your sales increase, you often increase your accounts receivable and you increase your inventory levels to handle the additional sales. Basically, if a business is not careful, it can grow itself out of business because it’ll need increased working capital to handle the increased sales and it takes time to finance the increase.
Most businesses don’t put any emphasis on their financial accounting until they have a problem. Don’t do this! By the 15th of every month you should know how well your business did last month. The focus of the business is sales and operations, but take time to track and count the money. Your accountant or seasoned bookkeeper should see you monthly. Don’t let your accounting take a back seat. Use an expert that specializes in spotting financial trouble to work on your accounting information to help you make informed business decisions. It you handle critical issues today rather than months later, the problem will not turn into a crisis.
How do you handle the monthly accounting needs in your business?
About the Author: Bert Doerhoff, CPA is the owner and founder of Accubiz, a firm providing accounting services out of Jefferson City, Missouri. Accubiz specializes in small business accounting, bookkeeping services, and wealth management.