Do you remember the days when you got a report card from school? Now that you have a business, your business has grades as well. It’s up to you to calculate them. Here are some grades or key performance indicators that you can compute for your business to give it a report card of its own.
How successful is your business from a financial standpoint? These financial ratios can help you give yourself a grade.
This is the difference between current assets like cash, receivables and inventory and its current liabilities such as accounts payable and credit card debt. It measures the organizations ability to meet its current obligations. A 2 to 1 ratio will get you an A+.
Return on equity
This ratio measures profitability as it relates to the investment or money you have tied up in your business. The formula is net income / average equity. An ROE of 15 percent or more is an “A” for your business report card.
Return on assets
This ratio measures profitability as it relates to your business assets. The formula is net income / total assets. An ROA of five percent or more is an “A” for your business report card.
This ratio measures efficient use of your business assets. The formula is sales / total assets. This number should be high for low margin businesses and low for high margin businesses.
How profitable is your business? You might know your bottom line number, but there’s more to it.
Gross profit margin
This ratio measures the financial health of a company as it relates to how much of every revenue dollar is available to cover overhead. Calculate it as follows: (revenue – cost of goods sold) / revenue. The value will be different depending on what industry you’re in, but some say a range of 25 to 35 percent is normal for small business.
Net profit margin
Net profit margin measures how profitable your business is in relation to the amount of sales you have. As an example, a business that can make $50K in profits on $500,000 in revenue is more healthy than one that can make $50K profits on $3 million in revenue. The formula is net income / total sales, and although it depends on the industry, a net profit margin over 10 percent is considered an “A.”
Report cards were important in school, and they’re even more important in business. If you’d like us to set up one for your business with specific metrics for your industry, let us know.
In small business, accounting refers to a set of tasks that revolve around maintaining a general ledger – your books — and preparing financial statements. Beyond small business accounting, there are many more aspects to accounting. In this article, we’ve prepared a glossary of accounting terms so you can discover the larger world of accounting.
Cost accounting. This type of accounting looks at the cost of items for sale. It’s especially useful in manufacturing, construction, or even restaurants where dozens or even hundreds of components are purchased and assembled to make the items that are for sale. Cost accountants account for and evaluate these costs to determine when they are too high or low and need to be repriced or purchased in a different way.
Cost accounting can be applied to small businesses to help them with pricing, determining breakeven points, controlling costs, and budgeting.
Government accounting. Government accounting is simply accounting that’s done for government entities. Government accountants are concerned with maintaining government regulations as well as learning a different way of keeping books.
Nonprofit accounting. Nonprofit accounting is unique to nonprofit organizations in that they often need to track and mark specific donations, manage grants and meet reporting requirements, fulfill public disclosures and reporting, and maintain a fund accounting process.
Financial accounting. Financial accounting is the preparation of financial reports for external use and includes providing financial statements.
Attest. Attest accounting is where a CPA goes through a process of verifying financial reports of a business to interested third-parties, such as banks and the public. The three main services in this area include compilations, reviews, and audits. Only a CPA can perform these services.
Fraud or forensic accounting. A specialty role in accounting, forensic accountants can help a company that has been the victim of fraud. There are also services available to help reduce the possibility of fraud.
Tax accounting. Tax accounting can be many things: the preparation of federal and state income tax returns for businesses, individuals, and other entities like estates and trusts; state and local tax assistance with collection, filing, remittance, and compliance; franchise tax support; and payroll tax collection, filing, and payment. There are more, but these are the big ones.
Budgeting. Making a revenue and spending plan is an important accounting function and every business needs a plan, a road map.
Internal auditing. Large companies have internal audit departments that maintain checks and balances for the company. In small companies, having someone in charge of monitoring internal controls would be the equivalent function.
Accounting systems. Some accountants are technology-savvy, and this type of accountant can help solve technology issues, integrate accounting system modules, and streamline workflow.
Fiduciary accounting. A fiduciary is someone legally responsible for financial responsibilities in an organization. Fiduciary accounting typically refers to accounting for trusts, but can have a much broader meaning.
Public accounting. Public accounting is practiced by employees in a public accounting firm, which is one that serves many businesses with varying accounting needs. This is opposed to private or industry accounting where an accountant goes to work for one company in their accounting department. Public vs. industry accounting is really referring to an accountant’s career experience.
Managerial accounting. This type of accounting focuses on internal numbers and how the organization can reach its goals. It’s broader than cost accounting, but there is an overlap. Accountants who serve in an advisory capacity to businesses will focus on this area.
Did we get all of the terms you might be wondering about? If not, ask us, and we’ll add it here.
Blockchain is a term that has been bantered about quite a bit when referring to the future of accounting technology. While its impacts are primarily long term in nature, let’s take a brief look to see what everyone is talking about.
Blockchain is a technology that can store transactions. Some people have referred to it as a digital ledger. Unlike your current accounting books, transactions recorded using blockchain technology are public. This digital spreadsheet of transactions or records is copied across thousands of servers so that there is no single point of failure. It’s a decentralized, distributed, and public digital ledger.
The blockchain ledgers are updated constantly as new records are added. They are also reconciled constantly. Once added, the records cannot be altered retroactively. This feature has many implications for auditing in that many records won’t need to be validated the old-fashioned way because blockchain is self-auditing. Auditors will still need to validate the non-digital components of a transaction such as physical inventory counts.
Prior to 2016, blockchain was originally referred to as block chain, where the blocks are the list of records or transactions. While the records are public, they are protected through cryptography. Each block includes cryptographic code from the previous block that keeps the entire chain of data safe and verified.
Blockchain is then a way for two parties to safely record their transaction permanently and with verification. While bitcoin is the most common current use of blockchain technology, many developers are working on new applications. Development started heavily in 2017, so it remains to be seen which applications will take off and which will die.
Blockchain’s uses in the future will be many:
- Banking is the most obvious application, and right now the focus is on international transfers.
- Stock trading.
- Smart contracts. This concept is a huge part of what blockchain could be used for. Smart contracts are economic actions using blockchain that can be recorded without human interaction. They could initiate bill payments after goods have been received and after checking that there are funds available.
- Legal transactions, such as land titles.
- Medical records, so that there is no more filling out of forms in each doctor’s office.
Blockchain in the future may eliminate the double-entry bookkeeping system that we have now. Instead of each person keeping their own set of records, companies will write their transactions into a public blockchain ledger. This will reduce the cost of bookkeeping in the long term. But for this to happen, much development must be done to standardize and optimize the financial system. Many accounting professionals are working today toward that goal, which is only a few years away.
For now, the biggest implication to realize for a blockchain future is that personal reputation will become incredibly important. Blockchain systems eliminate the intermediary so that you are doing business with other people in a peer-to-peer environment. Identity protection as well as reputation will become essential. Blockchain is also likely to take off first in countries where there is a lot of corruption and/or corporations are not trusted.
Blockchain may not impact your life today, but it’s definitely something to watch on the horizon.
Do you know if your marketing efforts are paying off? More importantly, do you know which marketing campaigns and channels are profitable and which are losing money?
Marketing is one of the toughest areas to calculate return on investment, and one of the reasons is because customers may have had contact with your company in multiple ways before they make a purchase. Other reasons such as a lack of systems are more easily solved and can give you valuable information that you can make smart decisions with.
One main goal of marketing is to acquire leads that will hopefully turn into buying customers and even repeat customers. To start measuring your marketing efforts, we need to find out where those leads are coming from and measure which ones became your customers. That means we need to develop a system that tracks a customer from lead source to sale.
The hard part is that some of this needs to be done outside the accounting system. The good news is that there are many tools and analytics available to help in this process.
One of the first things to do if you don’t already have it set up is to record the lead when they enter your sales process. Enter basic information about them in your CRM (customer relationship management system), and be sure to ask them how they found out about you. This will help you track the lead back to the campaign or channel that they came in on. Once they’ve made a purchase, you can connect the lead to the customer record and track revenue by marketing source.
If your leads come in digitally, there are many automated tags you can set up to track where they originated, whether it was from the web site, a particular web page, a social media account or a link from an email you sent.
An important statistic for businesses is cost per lead, how much it costs to generate one lead for your business. The cost will vary by channel or marketing source. For example, someone coming from your website will cost less than someone coming from social media in most cases.
Once you know how many leads to generate to make a sale, you can start calculating what your marketing budget should look like. More importantly, you’ll be able to forecast your revenue more accurately, too.
While numbers are probably the last thing you think about when you’re doing your marketing, they can be very effective for your bottom line. There are many metrics beyond cost per lead that would be valuable to measure as well. Here are just a few of them:
- Number of leads (in total or per channel)
- Number of press mentions
- Number of direct mail pieces sent out
- Number of email subscribers
- Number of social media connections per platform
- Number of posts sent, number of shares, number of comments
- Total web visitors, new and returning
- Google rankings for keywords
- Number of customer reviews per site, ratio of positive to negative reviews
And as always, if you want help developing these processes and metrics, please reach out.