Monitor Your KPIs at Least Twice a Year

The midyear financial assessment is a common practice among entrepreneurs who have successfully navigated both the ups and downs of their small business. They know that regularly assessing accounting measures will validate management decisions and uncover areas for improvement.

Fortunately, evaluating your financial data isn’t difficult when you know where to find the numbers that are crucial to your own small business.

The key performance indicators (KPIs) you will need to monitor reflect the nature of your operation: does your success depend on increasing sales, maintaining profit margin, collecting accounts receivable in a timely manner, or turning over inventory promptly?

Knowing the ratios that measure these factors allows you to make informed decisions throughout the year. And by watching these ratio trends, you’ll avoid being blindsided by circumstances that could have been foreseen – and prevented.

Reviewing revenue

The rate of sales growth is especially vital in a young enterprise. Greater sales volume is needed to ensure your resources are fully utilized. Measuring the sales increase in a recent period – such as sales in a calendar quarter compared with those in the previous quarter – is the first step.

Then compare that rate of increase against the rate measured in earlier periods. Eventually, revenue will flatline, as all your resources are being utilized to their full capacity. Until then, you’ll want to maintain your growth rate or find out why it has slowed. Later, the addition of more resources – such as staff – may be required to accommodate continued growth. As sales increase, profits should keep pace. Ideally, your profits should rise at a rate that is the same as or higher than that of your revenue.

Identifying inventory

Inventory turnover of items acquired for resale is an often overlooked but important measure. From the balance sheet, identify the cost of inventory currently on hand, and divide that figure by the cost of inventory sold in a recent period, which is found on the income statement. This is the inventory turnover.

For a clearer picture, multiply inventory turnover by the number of days in that period. This yields the number of days’ worth of inventory you have on hand based on recent sales. In this calculation, you will be looking for low numbers as an indication that your cash management process is unfolding as it should; you should have only sufficient money tied up in inventory as is required to meet upcoming sales.

Referencing receivables

The process of invoicing your customers after a sale doesn’t generate cash flow; the payment must be received. Meanwhile, the business has bills to pay. By measuring the accounts receivable turnover, you can determine whether the collections process is functioning in a timely way. Do this by dividing the current accounts receivable on the balance sheet by sales from a recent period from the income statement.

Then multiply receivables turnover by the number of days in the period to find the average number of days customers take to pay your invoices. When this number is consistent or diminishing over time, it’s a sign your cash flow management system is effective.

Details Matter in Tax Accounting for an Asset Sale

There are so many variables surrounding the sale of a business asset that it can be confusing.

Money received from the sale is only one element in the transaction; it’s not simply added to income as if you were selling a small item that was categorized as an expense when originally acquired. The cost of a fixed asset, such as equipment or a vehicle, is expensed over time as depreciation.

Understanding how this difference appears in financial statements helps you identify the underlying details for your tax accountant when the asset is sold.

The original cost for a fixed asset and the part of that cost already expensed as depreciation over time form an interlocking network with the sale proceeds. The difference between the asset’s cost and its accumulated depreciation is carried on the balance sheet as a net book value. A sale price that’s greater or less than book value is recorded as either a gain or a loss.

Book value is what the business is giving up in the sale. The asset’s original cost and accumulated depreciation are moved from the balance sheet to the income statement as a cost of sale.

The selling price is recorded on the income statement as sale proceeds. Both the cost and proceeds typically appear in the same account as gain or loss; however, your tax accountant needs both figures for accurate reporting.

Finally, repaying the asset’s loan doesn’t impact the gain or loss; it affects the amount of the sale price received as debt reduction rather than as cash.