In our decades long experience working with a wide variety of Las Vegas small business, one recurring theme seems to stand out. We have found that many Las Vegas business owners don’t really know how to read financial statements. A company’s financial statement is the “blood test” of that business and can reveal all kinds of critical information about a firm’s health.
Understanding the following financial metrics can be invaluable in understanding the pluses and minuses of your business. They are the fundamentals of every financial statement, both on the Balance Sheet and Profit & Loss statement. If you are looking for a business loan in Las Vegas, understanding these terms and the role they play in the success of a business, can mean the difference between failure, mediocrity, or great success.
Real Revenue: While most people think sales is revenue, revenue by our definition is money received in hand. If you sell something and don’t get paid right away, it can create the illusion that everything is fine but cash flow is king and without it, you will go out of business.
Gross Margin: Surprisingly, quite a few small business owners don’t exactly know what the gross margin is for their products and services. Here is the definition: Gross margin is a company’s net sales revenue minus its cost of goods sold (COGS). In other words, it is the sales revenue a company retains after incurring the direct costs associated with producing the goods it sells, and the services it provides. You want this number to be as robust asl possible.
Real Profit: This is not the amount of money you think you made but the actual real dollars made after all expenses and taxes are paid. When looking at a company’s expenses, make sure the entrepreneur/small business owner is not mixing personal expenses into their business expenses (e.g. car payments, house payments, etc.) to purposely lower the net profit and tax liability. While potentially good for the owner, it distorts the true profit of the company, and can impact borrowing ability.
Cash flow is King: You can be doing a $1 million dollars a month in sales and go bankrupt. If you need to build the product (pay for expenses upfront) and then sell the product through a distribution channel, you will be waiting 60-90 days or longer to get paid. That could be a business model that is unattainable in the long run unless your sales volume is high, you started with a large cash reserve, or your gross margin is so high (75% or higher) or you have a factor in place like Business Finance Corporation to supply your daily cash flow. Cash is the fuel that runs your business; do everything you can to maximize your working capital.
Accounts Receivable: This is the money that your customers owe you. Often neglected, this is one area of the business it might pay to staff correctly. We once had a small business owner call us on a Friday to tell us they just paid payroll with their credit card. This was a $2.5 million company. Turns out they had several clients that owed them more than $400,000 and were at least 60 days past due. This is where working with a Factor like Business Finance Corporation (www.bfc.vegas) makes sense. BFC was able to advance the dollars to cover their payroll and helped with effective collections of the outstanding invoices. If you do the work, make sure you have processes in place to get paid. Remember, cash flow is king.
Accounts Payable: The best advice we can give entrepreneurs and small business owners is to not spend any money that you don’t have to. Avoid leases with no out clause, avoid any equipment that you really don’t need, keep the business purposely lean. If there is one seminar entrepreneurs and small business owners should all take, it should be one on negotiation. How well you negotiate could impact the future potential of your business.
Employee Utilization: This is one area most people ignore (unless you are in the people services business) and more entrepreneurs and small business owners should pay attention to. If possible, assign a value of “billable or revenue hours” to your employees and measure the employees’ impact on revenue. By doing this, you might just find out where the most revenue contributions are made and how much revenue you can drive per employee before you have to hire another employee to avoid employee burnout.
For more information on using accounts receivable factoring to manage cashflow, see our website at: www.bfc.vegas