Three KPI’s that are critical to any business

Here are three KPI’s that are important to understand when running a small business and managing its finances along with a brief description of each:

Current ratio

Measures the liquidity of your business. It will show you if your business can cover its immediate obligations.  The current ratio is defined as the current assets of your business (most usually cash and accounts receivable) divided by the current liabilities of your business (vendor accounts payable, credit cards payable, short term balance on any loans, payroll liabilities). At a minimum you want this ratio to be 1:1 which indicates you have adequate current assets to meet your short-term liabilities. In an ideal world your current ratio would be 2:1 or better. This would indicate that you have double the current assets (cash and accounts receivable) to cover your current obligations. Building a cushion here shows that you can successfully build your business by turning your operations into much needed cash. Afterall, Cash is King!

Gross Profit Margin

Measures the percentage of revenue that is left over after deducting all expenses associated with creating and delivering your product or service for your customers. If your revenue is $5,000 and the cost to create, and deliver your product is $3,000 then your Gross Profit is $2,000 and your Gross Profit Margin is 40% ($2,000/$5,000). Your target Gross Margin will depend upon the type of business. Many software companies can have gross margins in excess of 60% while many labor-intensive service companies have Gross Margins from 35% – 55%. You want to make sure that regardless of your company that the Gross Profits you are generating are enough to cover the remaining operating expenses of your business. The higher the Gross Margin, generally the more profitable the organization. Many sophisticated companies understand the Gross Margins by individual product or service line. This will allow you to try and maximize the sale of the most profitable products and examine the less profitable products for potential improvements in production or delivery to enhance overall profits to the company.

Cash on Hand

Measures the amount of cash at a snapshot in time. This might seem obvious, however turning your company’s revenue and profits into cash, and growing the cash balance over time isn’t always easy. Once you have customers and a steady flow of revenue you need to establish a targeted cash balance that you can keep on hand. I am not talking about having just enough cash to cover your current needs like we talked about in the current ratio section, rather creating a goal of having 2-3 months of operating expenses on hand at any time. Most people want to talk about the revenue their business invoices or the profits that it generates. Converting your services or products into cash is the real measure of success. It is hard to spend revenue or profits, but it is easy to spend, or better yet, to save cash!

Let ChoiceFinance help you with understand the KPI’s and the financial strategy of your business and ultimately help you improve your profits and grow your cash!

A Business Consultant’s Advice on Hiring Full-Time Employees vs. Contract Workers

Business Consultant

Many small business owners struggle with the decision whether to contract a business consultant or to hire a full-time employee. There are pros and cons of each decision, so let’s review them below:

Pros of hiring contract workers:

  1. Hiring a consultant or contractor avoids the headaches of complex tax and benefits tracking. In addition, if you can find a 1099 employee, you can avoid paying employer payroll taxes such as FICA, Federal Unemployment Insurance as well as State Unemployment Insurance. Be sure to issue these employees 1099’s for the payment of services at year-end.
  2. Outsourced roles are often much more affordable than hiring a full-time team member. If your business needs specific expertise (finance, marketing or legal) but cannot afford a full-time, experienced person, many experts in the later stages of their career are willing to contract out their services at a lower rate.
  3. A business consultant can provide business owners with maximum flexibility for many unique situations. When the workload is unpredictable week to week or you need assistance on a per-project basis, there’s no need to worry about providing a steady flow of work with a contractor.
  4. Part-time help can provide much-needed relief for small business owners, helping them remain focused on the customer. Small business owners are passionate about what they do, but that doesn’t mean that they should be laboring over the books at midnight or trying to answer non-urgent calls that could be handled by someone else.

Potential cons of choosing contract workers:

  1. Keeping part-time, contract-based workers engaged in their work can be difficult. If they are not a connected part of the company culture, they can sometimes become disconnected from your vision for the future.
  2. Finding a capable business consultant can be tricky. Usually, the best employees are seeking permanent employment, so only offering contract work may shrink your talent pool.
  3. Contract workers often lack company-specific knowledge or product knowledge. This can translate into an un-tailored, less impactful work product or under-whelming customer experience.
  4. Business consultant relationships are usually short-term. Given this situation, the owner can be in a position of constantly training someone on their products and spending a significant amount of time searching for the right relationship.

As discussed above, there are benefits and cons to hiring a consultant over an employee. Small business owners should weigh these carefully, remaining conscious of their unique culture, business goals, and even personal needs. Ultimately, your decision will be unique to the situation and should include research and exploration. If you’re ready to start exploring the most cost-centric hiring practices for your business, request a meeting from ChoiceFinance for some powerful business insights.

Tips for Small Business Owners on Maximizing Cash Flow

Cash flow

Cash. It is a word that signifies something we all like to have in our hands. You can never have too much of it and it is responsible for helping you keep your business up and running. Without cash, you may find that you cannot afford inventory, or you cannot meet payroll, which can be scary for you as a business owner. Fortunately, there are ways for you to maximize your cash flow, even as a small business owner.

Your business is a game of expenditures, revenue, and profit. If any of those three metrics are not in line, your business will find itself in a tough spot. Maximizing your cash flow can help you balance those three metrics. Here are some tips to help you out:

Replace Your Old Inventory and Equipment

You cannot be efficient if your warehouse is stocked with old inventory and equipment that is useless to you. In addition, it takes up space, which could be used for other processes. Old equipment can lead to a slowdown in selling your product or reaching your customers, which will decrease your revenue and cause you to spend more to make it happen.

Replacing old equipment with newer equipment is a great way to minimize overhead costs and see to it that you can maximize your cash flow and process. If you are not able to purchase new equipment, consider leasing it.

Also, if you have excess inventory on hand that cannot be used, sell it off. You can sell it at a discounted price and still make money while clearing out room to be used for your business.

Create Incentives for Early Payments

You never know when a client will pay their invoice, but you can help maximize your cash flow by offering incentives for them to pay early as opposed to when it is due or late. Of course, you should have penalties in place for late payments to discourage them.

One of the many incentives you can offer for an early payment is a slight discount. You want the discount to make sense for your business’s final line and your client too, so do think about how you can incorporate it to incentivize without coming too close to your bottom line.

Outsource to a Financial Management Company to Free Up Time

Managing your finances can be tough, especially as a small business owner. It is something you NEED to do but not something you always HAVE the time to do. This is where you can turn to financial experts such as the ones at ChoiceFinance. They can assist you in managing your business’s finances and provide you with easy to read and understand charts to show you how your business is doing in a quick snapshot.

Fortunately for you, ChoiceFinance is affordable and costs much less than hiring an accountant to do it for you. This way, you can focus more on maximizing your cash flow without going broke in the process.

Start Maximizing Cash Flow Today and Enjoy Tomorrow

Maximizing your cash flow is about balancing out your budget, revenue, profit, and expenditures. Companies such as ChoiceFinance can help you do this while you focus on selling and bringing in the money. The above tips are just a start and there are more ways you can maximize your cash flow such as reevaluating the cost of your product or services, offering discounts to new or returning clients, and improving your marketing strategy and campaign.

Remember, maximize your cash flow today and enjoy every bit of tomorrow!