The life of a small business owner is often hectic, so you may not take the time to analyze your financials on a regular basis. While I completely understand feeling overwhelmed by the everyday work, there are a few things you should take the time to review. Today I’m sharing three items that you can look at quickly that may be a warning sign that your business’ financial health needs attention.
Poor Cash Flow
If you are showing a healthy net profit on the bottom line of the profit and loss statement, but you consistently find that your bank account balance on your balance sheet are too close to zero, you might have poor cash flow management. If you are operating at a profit, but you never have any cash on hand, then you need to determine where the profits are going. Some places to check are loan repayment fees, paying down credit card debt or paying yourself too much. Having poor cash flow can impede your ability to operate efficiently. It could also cost you more money in the long run through overdraft fees from your bank and higher interest rates from short term loans and lines of credit.
Too Many Non-Operating Expenses
Random non-operating expenses either get categorized into a miscellaneous expense account or the office supplies expense account. If you have too many purchases from Home Goods, this could be you. Seriously, this item is really about controlling your spending and making sure the purchases you make are essential to the operating of your business. Too many unnecessary expenses will decrease your profits and impede the growth of your business.
Rising Inventory Levels
On your balance sheet, if your inventory amount rises month after month and you are not in a significant growth mode, there is a problem. Rising inventory levels indicates one of two things. The first is that you are buying more inventory than you are selling. This could be as a result in the decline in sales or you are purchasing more inventory than in necessary. Either one requires an adjustment, so that you don’t incur cash flow issues in the future.
The second could be that you are not recognizing the cost of goods sold correctly for the inventory sold. The problem with this is that it gives you a false impression that you’re more profitable than you are, because you are not recognizing enough cost. It could lead to you making decisions based on profitability that doesn’t exist.
If you see any of these problems, it may be the right time to seek expert advice. The important thing is not to panic, with a few simple adjustments you can set your business on a more profitable path. I find these issues are best discussed over an iced Starbucks coffee, so please reach out and let’s chat.
Written by Tom Barnhill, Owner of Business by Barnhill