We all know that a small business needs a strong income to succeed, but determining the causes of either a well-performing revenue stream or a weak one might leave some people scratching their heads.
Instead of watching a company flounder for no discernable reason, upper management should take a look at several key indicators, and adjust the financial plan to account for any necessary changes.
Does cash really control the company?
In reality, total income controls how the business operates. This is an unavoidable fact, despite even the most well-intentioned small business owners. However, cash is a critical component of overall profit, and it differs than other revenue for a company, according to Forbes.
Therefore, a venture should look at net cash from operations in order to determine the overall financial strength of the company. Discerning the actual levels of cash may be hard to do, but there is a relatively simple formula – net income, minus uncollected cash, plus cash kept, the news source noted.
For example, a small business might provide services that don't require immediate payment, but this income is able to be tracked, and falls under "uncollected cash." If profits from this are greater than the monthly expenses, then net cash should be in the black.
What does this mean? It illustrates that the business' financial plan is working, and the customers are paying on time and in full. If net cash is negative, that might mean that the company isn't getting paid, or that the business isn't actively pursuing payment in a reasonable length of time, according to Forbes.
Keeping track of this metric will help a small business owner understand how a company is operating on a daily basis, and also determine what changes, if any, need to be made.
How to improve profit
If net cash is struggling to stay positive, there are a few financial tips that may turn a business around.
One of the fastest ways to do this is by increasing prices, according to small business blog mimosaPlanet. This is best performed in small increments. If a company raises its prices drastically – say, from a $25 an hour service to a $100 an hour – there is a really good chance that will deter new customers and turn-off current ones. However, a small uptick, maybe only 5 or 10 percent, won't have as much of a negative effect on the business.
Another viable solution deals with the exact opposite aspect – reducing purchase costs, the website noted. Doing this might have a similar result to raising prices. If it costs less to create a product or service, the business can charge less while still making a profit.
In addition, reducing expenses, while similar to purchase costs, should also be on a small business' to-do-list. There are always certain factors of a company that can be streamlined, and either eliminating jobs or parts of the process and removing redundancies might result in an increased profit.
Getting the most out of revenue
A financial plan might receive a much-needed boost if management has a better understanding of revenue.
If a small business owner attacks this problem by simply saying, "I'm going to increase revenue," odds are little will get done. Instead, focus should be placed on leads, and how many are converted into sales, according to Inc. magazine.
Revenue is the total amount of money that sales generates in one month, and it can be improved by cutting back on the length of time it takes to both acquire a lead and convert it into a sale. Some cost-effective financial tips to do this include improving a marketing strategy or boosting quality and production time, Inc. magazine stated.
Overall, net cash, revenue and profit are closely related, and a small business should analyze each one to gauge its financial strength.