This section discusses how calculating the five financial indicators can assist you in planning and growing your business. And this is what happens when an entrepreneur fails to notice them.
While most entrepreneurs think of revenue as the money received on their account or in the cash register over a specified time period, this indicator actually reflects the financial result of the business’s obligations to the customer. Simply put, revenue or business turnover.
The customer places the order and makes the payment in advance. The supplier delivers the goods and, if everything goes well, receives payment in full within two weeks. However, this is merely an agreement on a settlement strategy.
Revenue can be accounted for when there are documents confirming that the buyer has received complete ownership of the goods. For instance, if the customer has two weeks to return products of poor quality, the money from the delivery can be accounted for after the warranty period expires, rather than at the time of payment.
The simplest way to determine the health of a business is to monitor sales on a regular basis. In the retail or restaurant industry, it’s beneficial to monitor this indicator hourly to determine the team’s effectiveness.
Revenue monitoring must be carried out in the same manner as you would when betting via 22Bet, which means it must be done properly. The indicator can be broken down into two components for analysis: the total number of customers and the average bill. This will assist you in determining what factors contribute to sales growth or decline. Increased revenue and average receipts translates into the ability to sell more expensive products. If your revenue has decreased and your customer base has shrunk, it’s time to run advertisements and reach out to a new audience.
Profit is not the amount of money in the checking account, but the difference between the company’s revenue and current expenses. After all, the money that comes into the account must be used to pay rent, debts, and purchases. Certain expenses, such as employee salaries, may have been calculated but not yet paid – the funds remain in the account but no longer belong to the business.
Profitability analysis and planning are advantageous, even more so when profits are not yet available. When a business is just getting started, its expenses are always significantly greater than its revenue. This is referred to as a planned loss. The business simply cannot afford to cover all of the costs associated with equipment acquisition, promotion, training, and staff hiring in a single day. This process will likely take several months.
To determine when the business will be profitable, you must develop a financial model of business development. It should specify how long a loss is expected, when the company will reach break-even, and when it will earn its first dollar.
It is critical to not only monitor changes in the profitability of the business on a continuous basis, but also to plan profits in relation to future expenses. If revenue increases, determine whether you need to increase spending to keep the business operating and whether profits are decreasing.
Net cash flow is the difference between all funds received and expended over a specified time period. This indicator indicates whether the business is profitable or, on the contrary, “draining.” Cash flow is more important to investors than profit because it reflects the company’s true financial state.
Simultaneously, a negative cash flow does not always indicate an impending crisis. It may occur, for example, during a company’s restructuring phase, when additional funds are required than during normal operations.
If you do not monitor your cash flow and do not plan ahead, you run the risk of experiencing cash gaps – situations in which there is insufficient money to meet current obligations. For instance, the funds for the goods will arrive in a week, but the rent must be paid immediately.
Competent cash flow management enables an understanding of how much money is available to meet obligations to third parties, how much is available for the company’s development, and how much can be paid out as dividends. Therefore, in the event of a cash shortage, there will be time to secure additional funds or negotiate with counterparties: ask customers to pay bills early, obtain additional deferrals from suppliers, or secure a loan.