I realize that being a CPA makes me like numbers more than most people. But you don’t have to be a CPA to look at a few select numbers from your profit and loss and balance sheet reports to get an idea of how your business is doing. Here are 4 simple numbers that should always be compared to the prior year and looked at on a year to date basis, when applicable:
Sales
This is the first number on a profit and loss report. Look at your sales and then compare them to the prior year. In QuickBooks Online, you can easily do this and also click on the options to show a column for the dollar change and percentage change. Positive sales changes represent a growing, in -demand business, while a negative sales change represents a slow down.
Net Profit
Using the same profit and loss report, look at the net profit of the business. Is it growing compared to the year before? If sales are up 10% and net profits are up only 5% or flat, then why is this? There could be many reasons for this, especially if expenses temporarily increased to support an increased level of sales, but you want to make sure your growing sales eventually lead to growing profits. If your profits are growing the same or higher than sales, then that is the healthiest situation. A related metric is gross profit, but purely service-based businesses do not have this number.
Cash Balance
Looking at a balance sheet report, you will find cash at the top. Is it higher or lower than last year? Think of cash as the food to feed your business, pay expenses and pay yourself. Positive changes can mean higher sales and profits, less distributions or officer’s wages taken from the business. Negative changes can mean you aren’t as profitable as you were, customers aren’t paying you as quickly, or you are taking too much money from the business. In that case, you may need to review other numbers, such as accounts receivable.
Credit Cards & Loans
If you pay off your credit card balances each month and have no other debts, then this isn’t a concern. If you carry a credit card balance and other debts, then look at the balance sheet report to see the changes in debt levels. Rising debt levels can be a concern, while decreasing debt levels are healthier. Even if debt was used to purchase equipment, vehicles or make improvements, it still represents an increased business risk and personal risk as many business debts are personally guaranteed.
I can come up with many, many more metrics, but it’s better to view a few metrics then be overwhelmed by many and ignore them.