Quick Tips to Know If Your Business is Profitable

Most profession owners rely on top accounting firms in Canada to investigate the financial status and health of their businesses. However, most successful business owners would advise you to have a clear and intimate view of the financial health of your business to understand if and how you are making profits. You do not need to be a financial expert. Here are some easy and quick tips to help you analyze your profession performance and assess its profitability.

Metrics to Analyse Business Performance

Besides preparing a detailed business plan, analyzing, and reviewing the outcomes of your business plan and comparing actuals with your projects, you can use the following metrics to understand how profitable your business has been so far.

Income

Income is the key indicator of the growth and success of a business. While you may be registering income growth, have you analyzed the income growth in detail to understand your growth pattern? You can track your income on a daily, weekly, monthly, quarterly, and annual basis to understand your business performance. This will help you give a potential client or an investor a clear picture of your revenue and growth.

Expenses

You may have an accountant to help you keep a tab on the expenses you have to incur to run your expenses. However, you need to have a detailed understanding of the expenses and how to control them to build a business that promises returns to a potential investor. Top accounting firms in Canada will advise you that keeping a tab on the expenses and devising ways to keep them under check can help you increase the profit-earning potential of your business in the eyes of a potential investor.

Cash Flow Ratio

Cash-flow ratio is a critical aspect that decides the success of any profession. Several businesses have shut shop because of the lack of adequate cash flow. You may have a certain amount coming in every month into your account, but is that enough? According to top accounting firms in Canada, you must remember that at any given point you must have the asset and liability ratio at 2:1. If an audit of your business performance shows you a ratio of 1:1, then consider it to be a red flag and revisit your business approach to turn the situation around.

Timeframe for Receiving Payments

Another critical metric that decides the success of your business is accounts receivable ageing. In simple terms, this is the time frame that your clients take to make your payments. You must analyze if your clients pay within the time frame you have provided them to make the payments. If they cross the time limit by a significant period, there is a negative impact on your cash flow. The expenses eat into your profits and leave you with huge financial obligations.

Even if your profession is small, you need to set aside time and involve yourself in understanding the financial health of your business. You can inculcate your learnings into your business plan and look at newer ways of cutting down expenses and financial obligations to make your business more profitable.

To fully understand the profitability of your business, you must also consider the return on assets ratio. This ratio demonstrates the percentage of profit a company is making as compared to its assets. Understanding these concepts on your own might come across as a challenge. You can reach out to accounting firms that also offer customized payroll services to help you understand the financials of your business in further detail.

Growing a business is a very difficult thing, irrespective of its scale and size. One of the key aspects that aid to the growth of a business is the involvement of the owner — both operationally and financially. So, make sure you understand the financial health of your business inside out to keep making profits.

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