Three Critical Financial Metrics You're Probably Missing
I have a young daughter, and like most parents will say, one of the joys of having a little one is watching them discover new things. It’s almost like you can see their brain neurons developing by the minute. I remember not too long ago when my daughter discovered that her hands can grip things, not just flail around indiscriminately. She was so proud of her new discovery and used it as much as she could (on my hair, the dog's tail, etc)!
Similarly, the more I review financials from a diverse group of clients, the more insights I discover hidden within the lines of the financial statements. If you’ve been in business for any length of time, you probably know the basics of your balance sheet (cash, receivables, payables, equity) and income statement (revenue, expenses, net profit) and what they mean.
But, dig a little deeper and you will find some hidden insights into your business that can help you make better decisions. (And yes, I am totally giving away my secrets of financial analysis!)
Here are three areas of your financial statements that you're probably overlooking, but that tell a robust story about your organization.
1. Revenue diversity. Take a look at your revenue detail for this year. If you’re a service business, is over half of your revenue coming from one client? If you’re a nonprofit, is one donor supporting most of your programmatic expenditures? If so, this is a red flag. To ensure the stability of your business, you need a diverse revenue stream so if one source drops off the face of the earth, your operations aren’t in jeopardy.
2. Cash collection time. You probably know, at any given time, how much cash is in your checking account and as long as it’s enough to pay your bills, you probably don’t think twice. But as your organization grows (and we hope it is!), it will become increasingly difficult to meet your expenses if you don’t have a good cash collection process in place. Take a look at your accounts receivable and see what’s outstanding beyond 30, 60, and 90 days. Make some phone calls to collect that cash, regardless of whether you “need” it now or not.
3. Revenue and expense growth. When you run your P&L (also known as your income statement), include last year’s data for comparison. Now take a look at the percentage growth of revenue and the percentage growth of expenses. Which is higher? Are they equal? Your expense growth should not outpace your revenue growth because that means you’re tapping into your equity or reserves to cover those additional expenses. If your revenue growth is higher than your expense growth, congrats! You’re gaining efficiencies as you grow your business.
Next time you run your financial statements (which should be at the end of the month, RIGHT?!), dig a little deeper and see if you can find any hidden insights within those pages of numbers.
More insight means you can make better decisions and tell a more robust story about your organization!