How to Measure the Success of Your Small Business
Running a small business is no easy task. There are many hurdles that come along the way that can threaten the foreseeable future of your business. From severe competition to cash flow issues, small businesses have to overcome many issues to be considered a success.
Here are some ways to gauge how well your business is doing:
Financial ratios are an effective way of measuring the financial position of a business because they highlight areas that need improvement. Gross profit is a widely-used profitability ratio.
A business can calculate its gross profit margin to determine how much profit they’re making from the production of goods sold. If a company’s gross profit margin is high but the net profit margin is low, the additional expenses that don’t relate to the production of the goods sold are reducing the profitability. Valuable resources are being wasted on things that aren’t adding value to the company.
Return on assets
The return on assets determines how much a firm has managed to earn from their investment in assets. These include equipment, buildings, land, etc. If the return on assets is low, that means a business hasn’t invested in the right assets to help it reach its optimal production level.
It’s crucial for every business to know their breakeven point. This is where the business is able to cover all its expenses; at this point, the company is not making any profit. The reason this is important information is that it can help a business stay afloat during tough times.
Have you ever wondered why loss-making companies still continue in an industry? It’s because the company is managing to cover all their expenses with the revenue they’re earning. Breakeven points also help a business determine discounts to boost sales.
Cash flow statement
Financial statements are an important part of a business. There are three main financial statements a business should draw up every year. These are the profit or loss account, the balance sheet, and a cash flow statement.
The cash flow statement shows the increase and decrease in cash after every important transaction. Ideally, inflows should be larger than outflows; otherwise, the cash gaps may be too significant. Depending on the industry you’re operating in, cash gaps might be normal. Seasonal industries, in particular, are known to develop cash gaps during off-peak season.
Faber is an accounting firm that has been in the industry for over 20 years now. We have worked with corporate clients of all sizes, providing them with accounting services, tax planning, and consultancy services. Our team works tirelessly to help clients in achieving success.
Get in touch with our experts in Edmonton, Alberta today at
780-432-5262 and book an appointment.