Money problems can be avoided by monitoring a few key financial areas. The good news: you don’t have to be a wizard at financial statement analysis; you just have to be vigilant.
Cash on hand: Monitoring cash balances is a simple process. It just requires a regular glance at your company’s balance sheet. Bank accounts appear at the top of this report, and you should frequently compare account balances over time.
Determining whether you have enough cash on hand involves some quick math. Cash, plus the receivables you expect will become cash within a month, should exceed the near-term debts you owe – called “current liabilities” on the balance sheet. Current liabilities include credit card balances, payroll taxes, sales tax, and other upcoming amounts you expect to pay.
Spending: A significant number of business errors are the result of not knowing where the money is going. Money should be spent for things that simplify your business and make you more productive. The income statement (also called the profit and loss statement) will help you evaluate your spending habits.
Here you’ll find the percentages of each expense category relative to revenue. By comparing this report over multiple periods, you’ll discover how your expenditures may have changed as percentages of revenue.
When business is going well, you’ll want to keep spending the same percentages of revenue for the expense categories that are variable. With fixed expenses, such as rent and telephone, what will hopefully be an increase in sales will cause the percentages of revenue for these categories to favorably decline.