Important Finance Analytics to Track for Your Small Business

As a small business owner, tracking key financial metrics is crucial for monitoring the health and growth of your business. Finance is the lifeblood of every business, and understanding the inflows and outflows is essential. Here, we explore important finance analytics that every small business should track to ensure they are on the right path.

What is Financial Analytics?

Financial analytics involves examining a company’s financial data and documents to assess its performance and predict future growth. The key financial documents in this process include the cash flow statement, income statement, and balance sheet. These documents provide the foundational data for most financial analyses, though additional information may be necessary depending on the specific needs of the business.

Importance of Financial Analytics

Adopting a strategic approach to financial analytics is vital for your business. Here’s why:

• Comprehensive Financial Overview: Financial analytics helps uncover everything about your company’s financial health, ensuring no critical data is overlooked.
• Single Source of Truth: By consistently documenting and synthesizing your financial data, you create a single source of truth, ensuring decision-makers have access to the most accurate and current data.
• Future Insights: Financial analytics allows you to see past trends, understand your current financial status, and make informed predictions about the future. This enables you to make well-informed decisions and seize opportunities as they arise.

Common Financial Analysis Styles

1. Horizontal Analysis

Horizontal analysis compares financial data from two or more consecutive periods. For example, you might conduct a year-on-year or month-on-month analysis of your revenues. This helps identify specific trends and potential issues.

2. Vertical Analysis

Vertical analysis assesses a line item in a financial statement as a percentage against a base figure, such as total assets, total liabilities, or total cash inflows. This analysis helps you understand where your finances are going and make informed decisions on resource allocation.

3. Short-Term Analysis

Short-term financial analysis looks at your use of working capital for a defined period, compared to your long-term average. The goal is to ensure steady financial operations and identify any sudden changes that may need attention.

4. Company Comparison

Company comparison pits your company’s financial situation against one or more of your direct competitors. This is often used during due diligence processes to ensure sound investments.

5. Industry Comparison

Industry comparison uses your industry average as a basis for comparison. The goal is to identify discrepancies in your financial situation compared to industry standards and make necessary adjustments.

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Key Financial Analytics Areas

1. Cash Flow Analytics

Monitoring your cash flow is essential to ensure you have enough liquidity to cover expenses and sustain operations. Track cash inflows (sales, accounts receivable) and outflows (expenses, accounts payable) to forecast your cash runway and identify potential shortfalls. This offers a snapshot of your cash flow at a specific point in time and compares it to your optimal cash flow, given all known variables.

2. Sales Revenue and Average Sales per Day

Sales revenue is a fundamental indicator of your business’s success. Tracking total sales revenue and average sales per day helps identify trends, seasonality, and growth opportunities. Calculate average sales per day by dividing total sales revenue by the number of days in the period. This analysis can help you understand sales trends and forecast future performance.

3. Customer Acquisition Cost (CAC) and Lifetime Value (LTV)

Understanding the cost of acquiring new customers (CAC) and the projected revenue they generate over their lifetime (LTV) is crucial for sustainable growth. Aim for a high LTV to CAC ratio, ideally above 3:1, to ensure profitability. This analysis helps you make data-driven decisions about marketing spend and customer retention strategies.

4. Budget Variance

Tracking the variance between your actual and budgeted expenses can identify areas of overspending or underspending. Negative variances may indicate inefficiencies or areas for improvement, helping you stay on track financially. Regularly reviewing budget variances ensures that your financial planning is aligned with actual performance, allowing for timely adjustments.

5. Liquidity Ratios

Liquidity ratios, such as the current ratio (current assets divided by current liabilities), measure your ability to meet short-term obligations. A higher ratio indicates better solvency and financial health, ensuring your business can meet its financial commitments. This metric is vital for maintaining the trust of investors and creditors.

Summary

Monitoring these key finance analytics areas provides invaluable insights into your company’s financial health and performance. By leveraging these analytics, you can make informed decisions, optimise resources, and drive sustained growth and success.

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