The biggest mistake of (almost) every entrepreneur
Every business owner must keep an eye on all areas of his business. Since the financial indicators to sales, production and inventory figures. The problem is that this general view can often make the manager unaware of the true details of his finances. In my opinion, one of the biggest mistakes most business owners make is a cursory look at their finances. If you believe that knowing your income, expenses, and whether you make a profit or a loss is enough, think again. Nowadays it is important to know these 4 indicators in order to make convincing and informed decisions:
1. Financial margin - contribution margin
This is perhaps the most important financial indicator because it will tell the business owner how much of the proceeds from sales after deduction of direct costs carry fixed costs and ultimately make a profit. The process is very simple if your contribution margin is negative; it means that something is wrong; after all, it is impossible to pay the fixed costs with a primary loss. If your contribution margin is positive, you will need other indicators (such as the break-even point) to understand if this margin is sufficient or not.
2. Financial Indicators - the break-even point
The breakeven indicator is extremely important because it shows exactly whether or not your goal of no injury is feasible. It tells you how many products (or projects) you need to sell to avoid blushing. Again we have a very practical analysis logic. You need to compare the break-even indicator with your production and sales capacity. For example, if I have to sell 100 cars so that my dealership can tie up its revenues and expenses, but I can only produce 80 cars, this is a clear indication that my direct or fixed costs exceed my capacity. Another scenario would be you until you can produce 200 cars but have an average turnover of 50. In that case, you either have to invest in strategies to increase sales or reduce costs. So you have to sell fewer cars to reach breakeven.
3. Financial Indicators - Profitability
This is another pretty cool indicator to keep in mind, because it’s more than just working with your company’s revenues and expenses, it’s a clear analysis of your operational efficiency. The profitability indicator tells you what percentage of your revenue is left over at the end of the month. Basically, the higher the profitability, the better. Based on the unique and unique view of this indicator, which stream would be the most interesting?
- Sales: $ 100,000
- Spending: $ 90,000
- Profit: $ 10,000
- Sales: $ 50,000
- Expenditure: $ 40,000
- Profit: $ 10,000
If you analyze well, you will find that Project A’s profitability was 10% and Project B’s 20%. H., Project B has a percentage of costs lower than A. It is always worthwhile to look at the overall profitability of the company and to analyze where it is possible to reduce the costs (direct or fixed) in order to increase this profitability.
4. Financial Indicators - Cash Generation
Generating cash is closely related to profitability, but now, instead of looking for percentages, it will also be necessary for the business owner to see the amount “saved” by the end of the month. Generating and saving money can be the difference between bankruptcy and survival of a business because it allows the creation of a reserve fund for times of crisis or financial difficulties.
The answer is a little obvious, the bigger the indicator, the better. To make it even more interesting, it makes sense to reach the cash generation goal with a value you want for the reserve fund and another for the profit distribution at the end of the year.
For example, if you want to have $ 120,000 reserve funds and intend to make a distribution of $ 240,000, you need to have an average of $ 30,000 monthly cash flow, which reaches the end of the year with their goals in mind and be put into practice.
Other important financial indicators
In my opinion, these are the key 4 indicators that business owners need to keep an eye on. Now some other business features make other indicators more important than what I mentioned here in this post. Therefore, I will list a few others that may be essential depending on the moment of your company:
- Cash and cash equivalents (difference in trade payables)
- Working capital (the difference between current and non-current assets)
- Financial projection (financial planning budgeted against Real)
- EBITDA (earnings before interest, taxes, depreciation, and amortization)
- Debt (liabilities from cash equivalents) If you have an important indicator that I have not considered here, just write in the comments, and it will be a pleasure to update our list.