Seven Important Financial Factors of Small Businesses

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Small entrepreneurs often get themselves in trouble, when they take big orders. Many business professionals are eager to get big contracts, but they may not have the financial capacity to achieve that. Handling a big order may require proper cash reserve to pay for materials and workers. To understand your ability to handle big orders, here are some important financial facts that you should know

  1. Assets: Assets may include our building, land, furniture and equipment. You need to have a complete idea of the total value of the business. In some cases, a business may have an office building and piece of that land that are worth more than the business. You should know that the office furniture and computers often have declining values.
  2. Liabilities: It is easy to assume that liabilities are simply things that you owe. Loans are obvious liability and taxes could depend on the overall size of the payroll. If you rent the office and land, the bill from the landlord should also be considered as part of the liability. When you repay liabilities, make sure that proper amount of payment is applied against interest and principal.
  3. Cost of production: It can be defined as the cost of producing items that you sell. This can be relatively easy, if you buy a finished item for resale. However, if you produce your own products, calculating all the factors can be quitetricky.You may also need to include storage, marketing and back-end administration costs. You should how much it will cost to get your products sold.
  4. Gross profit margin: You can calculate this by dividing total sales with gross profit. It is important to ensure that your gross profit margin remains trending upwards and consistent. If this is the situation, it’s possible that your company is on track. If you monitor gross profit margin, it is possible that you can adjust costs and prices.
  5. Debt to asset ratio: This should be easy to calculate, once you accurately determine your total assets and liabilities. You should know how much that you owe to the lender and how much your asset actually is. If this ratio is climbing, it could be a bad sign for your company. You should consider your situation, as an example, you may get in over your head.
  6. Value of accounts receivables: This is the actual money that you owe to the lender. It is also an indication that there’s something happening in your company if account receivables are increasing. It is possible that your business is growing or you are simply exceeding normal expenses, requiring you to borrow money to lenders.
  7. Average collection time on accounts receivables: If the average collection time is longer, it is another aggravating indicator that you should know about. Cash-strapped businesses could struggle to pay back their loans, especially during early years. If it takes a long time for you to repay the loan, you should consider what’s wrong with your company. Whatever you do, you should avoid borrowing more loan to repay your current debt, which may make your situation worse.
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