As you start to use QuickBooks, you’ll notice that the software creates dozens of great reports that you can use to make informed business decisions.
Over time, you’ll start using many of these reports, but now is a good time to think about the financial data that is most useful to you.
Get started with these six metrics that many small business owners use to make important decisions. Work with an accountant to understand which reports are most relevant for your business.
The three components of the balance sheet are driven by the balance sheet formula:
Assets – liabilities = equity
A balance sheet provides detail for each of these categories:
The balance sheet tracks the assets you have, the money you owe, and the equity you’ve created by generating profits in your business.
An income statement is generated using the income statement formula :
Revenue – expenses = net income (profit)
Revenue includes sales of a product or service, and expenses are costs incurred to generate revenue. The income statement is also referred to as the profit and loss statement, and reviewing this report helps you control your costs and generate more revenue.
A successful business generates most of its profit from operating income, and you should pay attention to this metric.
Operating income, which is a category in the income statement, is generated from the day-to-day activities of running your business. If you manufacture mountain bikes, for example, the vast majority of your sales and profits should come from bike sales.
Operating income is sustainable because the bike manufacturer produces and sells bikes every month and year. Non-operating income, on the other hand, is not consistent or predictable. If the bike manufacturer sells a piece of equipment for a gain, the transaction is posted as non-operating income.
The bike company is not in the business of selling assets each year, and no company can survive over the long-term by relying on non-operating income to produce annual profits. Focus on operating income to build a viable business.
If a firm doesn’t monitor the amount of debt borrowed over time, repaying the debt may become difficult, so use your accounting software to run a report listing the debt to equity ratio.
The formula, (total debt) / (company equity), is used to analyze debt as a percentage of total equity. Let’s assume that a typical ratio for companies in your industry is 2-to-1, or $2 in debt for every $1 of equity issued. If your firm’s ratio climbs to 3-to-1 or 5-to-1, it may be a red flag that your total level of debt is not manageable.
If your debt to equity ratio is increasing, take steps to reduce your debt load. Review your expenses and cut spending, so that you can pay off debt faster.
Firms that do not closely monitor accounts receivable and enforce a formal collection policy may not generate sufficient cash inflows to operate.
Use the aging schedule for accounts receivable report, which groups your receivables based on when the invoice was issued to a customer. You should monitor this report and implement a collections process to email and possibly call clients to ask for payment.
Profit margin is defined as (profit/sales), and this metric is a great way to track your profitability as your firm grows. Your profit margin reveals the profit earned on each dollar sold, as a percentage of sales.
Assume, for example, that you generate a $50,000 profit on $500,000 in sales, which generates a 10% profit margin. The next year, you post a $51,200 profit on $640,000 in sales. Your total profit increased, but your profit margin declined to 8%.
Use profit margin to make changes, so that you can maintain a higher level of profit as your business grows.
If you have a set of reports and metrics to use, you’ll build confidence as a business owner. Find an accountant who can help you determine the most important financial information for your company.
If you already have one, log in to your QuickBooks account and invite them to your books to begin advising you. Or, you can start your search with the QuickBooks Find-a-ProAdvisor site to find a professional that’s right for your business.
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