Understanding the financial trajectory of your business is one of the most important aspects of being a successful business owner.
As we’ve recently seen during the period of COVID-19, many businesses small and large have failed or been forced to reorganize. If these businesses asked these seven questions much earlier on and received answers, they’d have been in a much better position to take action early. Those actions may have positioned them better for long term viability.
As a business owner, you must ask these questions of your business regularly so you can make good decisions today for better outcomes tomorrow.
Questions Every Business Owner Should Ask Regularly About Their Business Finances
1. What Is Our Current Cash Position?
Knowing your daily cash position is important. It not only helps you understand your ability to financially manage the business day-to-day but it also helps you understand seasonality or other cyclical ebbs and flows of cash in the business.
By understanding those ebbs and flows, you can better determine if you should add new lines of business or products to help even out cash flow. If you have cash surpluses it can help you determine when and where distributions need to be made. It can also help you determine when to invest to help create passive income. You’ll also know how much you have available when you need to reinvest in operations.
QuickBooks is a powerful tool for looking at your current cash position. When complete information is pulled in, you can run a series of accurate reports that show you where you are in the moment along with historical records. That comprehensive data can help you create useful projections as you look into the future.
Understanding your cash position is a key element in managing a successful business. Make it a priority to review this on a daily basis, or at minimum, on a weekly basis. You’ll be surprised by what happens in your business when you start closely monitoring your cash position.
2. What Changes To Our Pricing Model Could Improve Sales And Profitability?
All too often when discussing financial growth with business owners and management teams we discover that they forget to regularly challenge their pricing model. When you fail to ask this critical question and balance it with market data, you offer competitors an opportunity to gain a foothold where one didn’t previously exist.
Here are a few clues to determine if it is time to review your pricing model:
- Competitors Are Selling Inferior Products Or Services At An Equal Or Higher Price – If your competition sells similar, but inferior, products at a higher price there is a strong possibility that you need to rethink your model and your value proposition.
- You Almost Always Win Or Rarely Lose A Sale – If you are winning every sale, chances are you are underpriced. Take a strong look at where you might be able to increase price and margin. You may win a few fewer sales but ultimately be more profitable.
- Discounts Drive Your Business – Occasional discounting can be a good way of generating sales but if you find yourself living from sale to sale, it’s time to revisit your model.
- You’re Seeing A Decline In Your Average Selling Price – Don’t be too worried about temporary declines in your average selling price, but if you begin to notice that they appear to be permanent (your daily cash position can help tip you off to these changes) market conditions may be changing. You may benefit from reviewing your pricing strategy again.
- Your Cash Flow Is Down – While it may seem obvious, keeping an eye on your cash flow can be an early indicator of a need to reevaluate your pricing strategy.
3. What Are The Drivers Of Our Biggest Gross And Net Margin Movements Over The Past Year?
Understanding what moves your margins is a key element in understanding the long term financial viability of your business. Take the time to understand what drives the margin in your business and what impacts it most.
4. Which Of Our Products Are The Most Profitable?
Too many times we see businesses who think they know which products are most profitable but it is based on a gut feeling, not the actual numbers.
We recommend you review product profitability at least quarterly to see which products are most profitable and to discover if profitability is changing. Again, QuickBooks reporting can give you quick access to this information and it makes reviewing easy. Your bookkeeper, full-time or outsourced CFO or accountant should be able to help you set up reports that make reviewing this data much easier.
5. If Needed, What Are The Areas We Could Tighten Up?
Having a regular look at areas where your expenses are high is a good way of understanding where you can recoup profit or where you can find cash if you need to. Many of these expenses could be conveniences or simply nice to have products and services rather than essentials. Review your expenditures monthly to cancel subscriptions, auto-payments, and other charges that you no longer need and make a list of the items you could cut if you need to.
6. Do We Have All Of The Financial Reporting Set Up To Easily Get Reports Needed To Make Financial Decisions?
Accounting software like QuickBooks can be one of your most useful business assets when it is set up properly.
QuickBooks is much more than just a place to record your sales and expenditures. When you properly and fully set up QuickBooks it will provide you with all the information you need to make good financial decisions at the touch of a button.
To see which QuickBooks version is right for you, and how you can best set up QuickBooks to answer key financial questions MISSION Accounting can help. Feel free to call one of our specialists at 203-227-9475 to discuss.
7. If We Needed Capital Could We Get It?
The old saying goes “banks only want to give you money when you don’t need it.” All businesses need access to capital whether a line of credit to help manage cash flow or for capital expenditures. Building a strong relationship with your bank early is key to having access when you need it. Being in a good position financially when you begin the process, and demonstrating strong financial accountability and controls gives you a head start on the cash you need when you need it.
As you read through the questions above, how many could you easily answer based on available data right now? If the answer isn’t “all of them,” it’s time to act.
Whether you have a Chief Financial Officer (or outsourced CFO), or just a bookkeeper, it’s up to you to ask and get answers for these important questions on a scheduled basis. This is so you can make the required decisions to run your business effectively. If that means updating or setting up a QuickBooks product, we’re here to help.
If you have questions about your business finances and how to maximize your financial effectiveness, we are happy to help you find answers and solutions that will scale with you as you grow your business.
Bernard Roesch, Mission Accounting Help’s founder, is a Harvard MBA and a QuickBooks ProAdvisor. He and the rest of the team here can help you choose a QuickBooks product that’s right for you, set it up so it’s optimized for your business, and train you and your staff on how to use it. We also provide ongoing or project-based bookkeeping and CFO services. Let us know how we can help you!