When it comes to quickly evaluating how my business is doing, there are two numbers I pay attention to above all else. These two numbers tell me very quickly how exactly my business is doing and whether or not there are any major looming problems. Both numbers are really easy to calculate, too.
The first number is the average bank balance for the past thirty days. Thanks to online banking, I can easily look at how much cash I have on hand every day. I track this information and look at the average of the past thirty days to give me a good picture of the true balance of the account without worrying too much about the fluctuations throughout the month with regular bills and regular income.
Cash on hand is the key factor in the success of a small business. If you are consistently strapped for cash and you're living off of credit instead of using credit as a tool for business success, your business is at risk.
How much is enough cash on hand, though? There are countless different formulas and schools of thought on this question, but for me, the answer is pretty simple. I just compare the average bank balance of the past thirty days to periods in the past - six months ago and a year ago. If I see a notable difference that isn't explained by a comparable increase (or decrease) in revenue, I know that something's afoot. In other words, I use my own past as a guide.
This tactic is by no means perfect, of course, as it doesn't take into account any other changes in your business, but it serves greatly for a quick look to see if there are any obvious problems. Which is exactly what we want from that number.
The second number I look at is the average number of days to customer payment. This usually fluctuates with the economy - if the economy is bad, this number is usually a bit higher. However, any increase in this number is noteworthy and worth evaluating more deeply.
As with the average bank balance, I usually compare the average number of days to customer payment from the last thirty days to the same number from a year earlier. Ideally, the number holds steady or - if I've improved my billing standards - has decreased a bit. A small increase in a down economy is acceptable. An increase in a good economy, though, or a big increase at any time means that I need to step back and take a serious look at my billing practices.
These two numbers provide tremendous insight into how my business is doing at any given time. If these numbers are stable or are improving, my business is usually in solid shape. Of course, these numbers are not a substitute for deeper analysis - they're just a simple way to keep tabs on the cash flow of your business.
