Navigating a business through the challenges of growth can be both exciting and worrisome at times. With many gears in place it’s hard to keep a close eye on all the moving parts. Here’s our recommendation for the top 5 financial indicators that your business should be monitoring.
- Gross Margins
- Accounts Receivable (A/R)
- Accounts Payable (A/P)
- Inventory Turns, and
- Retained Earnings
The Gross Margins are the difference between the sales price and the cost of goods (COGS). Different industries have different percent margins, but on average, a business should have Gross Margins equal of 15% or more.
Accounts Receivable are the completed sales that have open invoice waiting to be paid. It’s important to know your industry standard for turning over A/R . For some industries, if A/R is not turning within a 15 day may indicate an issue; yet for other industries a 30-60 day turnover for A/R is expected. If you find yourself with all your cash flow held up in A/R there are financing solutions available through invoice factoring companies like Universal Funding.
Accounts Payable represents the credit given by your vendors and obligates you to pay the short-term debt. This is an important number to keep your eye on as it can affect your cash flow. As a general rule you want your A/P to be less than 50% of your A/R.
Inventory turns are another key indicator that should be reviewed on a monthly basis. Turns of at least 4 times a year on your inventory should be achieved (which means you are rotating your inventory 100% every 90 days at least), while 6 to 12 turns a year are very healthy. If cash flow is keeping you from achieving inventory goals, invoice factoring will be a fast solution to increase turns.
Retained Earnings are the excess profit that your business makes during the year and puts back in the business to build the working capital base. The benefit of this objective is that you are creating a historical precedent of profitability year after year.
When these 5 financial indicators are monitored and managed correctly you can anticipate a positive affect in shaping the future growth of your business. If you find yourself in a cash flow pinch while managing these indicators, let Universal Funding provide some relief. Call 1-800-405-6035 to get started today.