Introduction

Small business owners spend countless hours building their businesses from the ground up. However, the health of a business is measured not just by the time invested, but by the results achieved. Reviewing your financial performance is a top priority on your to-do list.

Achieving financial success is the lifeblood of any business. Especially if you own a small business, your number one priority should be reviewing the performance of your company on a regular basis. Why? To ensure that your business thrives, you’ll need to pay attention to trends, patterns, and changes in both net income and cash flow — if you want to know how to positively impact future results. Consistently evaluate and analyze both small income statements and cash flow reports.

After your business has been running for a couple of years, it’s worth taking a step back to review how well you’re doing. You will want to look at the bigger picture and consider what actions you need to take to make the most of your market position. To keep your company moving forward, you must assess its progress on a regular basis, consider ways to capitalize on its strengths, and identify ways to shore up its weaknesses.

Background

Congratulations, you have conquered the arduous step of getting your small business or startup established and running. You may have landed a few big contracts or customers along the way, so you are inclined to let the business run as usual, but you have no idea how your business is doing as a whole or if it is prepared for the next level.

However, business is volatile, and the only thing you can count on is that it is constantly changing. Being an entrepreneur means that your business is always a work-in-progress, and the work is never finished, regardless of how much money you make.

Because business operations are constantly changing, it is critical to review business progress on a regular basis, identify what needs to be done to maximize market position, and decide where to take the business next.

Your business will have successes and failures. Measuring business performance will help measure achievements and small business milestones. Or it will help identify areas that could be improved and suggest the actions needed to implement the improvements identified.

The following scenarios can highlight the importance of regular reviews:

• Uncertainty about the company’s performance

• Uncertainty about whether the company is capitalizing on market opportunities.

• Out-of-date business plan

• The company is heading in a different direction than expected.

• The company’s response to market demands may be deteriorating.

• The company is ready to advance to the next level.

Every smart entrepreneur should understand how to measure business performance beyond just the number of products sold or the amount of money in the bank, as it encompasses much more.

Why should small businesses examine their financial performance?

Small businesses often operate on the assumption that they are too small to need to review their financial performance. This is a dangerous assumption to make, and one that can result in a business’s collapse if not corrected. It is especially crucial for small businesses to review their financial performance because they don’t have the same resources as larger companies to recover from mistakes.

Reviewing your financial performance allows you to see what is working, what isn’t working, and what you need to change to get back on track or stay moving forward. It also gives you an opportunity to celebrate your successes!

Let’s be honest: reviewing financial performance isn’t the most fun thing in the world. It’s not like checking out a new restaurant or getting your nails done. But it’s crucial—as a business owner, it can mean the difference between being able to grow your company and sinking into debt.

Reviewing financial performance is about more than just looking at your statements and receipts. It’s about keeping track of where you are, where you’re going, and making sure that everything is on track for your goals.

It helps you avoid surprise expenses, wasted time, and unnecessary risks. And if your business is growing fast, you need to keep a close eye on its financial performance to make sure you stay afloat as it grows. You may not love doing it, but the results will speak for themselves!

The following are a few reasons why you should examine the financial performance of your small business.

• What you don’t measure, you can’t manage.

• Identify unexpected financial trends.

• You can see where you are wasting time.

• You can determine where your cash flow will be constrained.

• You can determine whether your prices are competitive.

• You may discover that you are overpaying for certain items.

• You can benefit from tax breaks and incentives.

And so much more.

When to review financial performance

Small business owners should review their financial performance regularly to ensure that they’re meeting their goals.

Every small business is different, and there’s no one-size-fits-all approach to reviewing financial performance.

That said, most experts agree that you should check in on your business’s financial performance at least once a month, if not more often. This way, you can spot problems and address them before they get out of hand. Plus, it helps you make sure you’re on track to achieve your goals, and it gives you an opportunity to identify changes that will help you do even better than expected.

Small businesses can aggregate performance periods into quarters, half-years, and years, in addition to the monthly review, to see how the business is doing over time. If available, year-on-year comparisons and 3-to-5-year historical figures can also help with reviews.

What to look for when reviewing financial performance

When you’re a small business owner, you can’t be a jack of all trades—you certainly don’t have time to become an expert in accounting. It is daunting, especially if you’re not a numbers person, to review the financial performance of a small business. If you don’t have the right tools and you aren’t looking at the right data points, you could easily miss something important—something that could affect your bottom line.

So where do you start?

There are several ways to approach it, but regardless of which way you choose, here are some things to keep in mind:

-Look for trends. Why are sales up one month but down the next? Is it seasonal? Is it an issue with one product or service? Is there an external factor that’s affecting things?

-If overhead is high and sales are low, do you need more staff? Do you need to cut back on labor? Do you need to invest more in training? Are your prices too high?

-Do your suppliers know what they need from you to continue supplying your business with what it needs? Do they want money up front instead of on credit because their business has been struggling lately? These are all things that will affect your business and its ability to continue growing.

More specifically, you can look at the following areas:

1. Is your revenue growing? If not, why not?

2. Do you have enough money coming in?

3. Are you making enough gross profit?

4. Are you generating enough cash from operations?

5. Do you need to raise more capital or take on new debt?

6. Are there any trends over time that could indicate an issue with your business model or operations?

As before, there is so much more depending on the size, nature, and complexity of your operations.

Tools to measure business performance.

1. Financial Statements

Businesses frequently fail due to poor financial management, even though this is one of the simplest ways to measure performance. It provides a general overview of how the company is doing financially. A business will not survive without proper financing, and by constantly monitoring it, one can immediately tell how much profit or loss the business is making, how many assets, liabilities, and capital the business has, or how the business has been spending money. In simple terms, it enables you to monitor how much money is going in and out of the business.

Use the income statement, balance sheet, and cash flow statement components of the financial statements required for your small business to assess cash flows, working capital, cost base, borrowings/debts, and growth.

Irrespective of an entrepreneur’s background, having the requisite knowledge to review financial statements is particularly important. Stories abound of entrepreneurs and businesses that have failed because of terrible financial decisions taken that could have been avoided if the financial metrics had been properly monitored.

2. Customer Satisfaction

An essential measurement of small business growth is customer satisfaction. As a profit-making company, if customers are not completely satisfied after doing business with you, it will reduce your chances of gaining a repeat customer.

Customers help improve the quality of products or services. Customers know what they need, and small businesses should learn how to satisfy their needs by listening to them. Many of the services a business offers are because of customer requests. Businesses that do not monitor customer satisfaction will lose customers to the competition.

There are several methods for measuring customer satisfaction, but the best is to directly engage with them to understand what they are looking for. Surveys, reviews, and product testing groups may be effective. The idea is to have a clearly measurable way to monitor customer engagement.

3. Employee Performance Reviews

Employees are essential to running and growing a business. No matter how knowledgeable one is, it is next to impossible to handle all the tasks alone. Because the input of every single employee is crucial to how a business operates, conducting performance reviews to gauge employees’ performance is an indirect way of carrying out business performance reviews.

Try to conduct performance reviews at least twice a year. You can find out how effectively they complete tasks. Performance reviews help employees see what they need to improve and have further insight into their assignments.

These reviews can help assess if the right skills and talents are in place for growth or if staff need new or improved skills or to be retrained.

4. Market/Industry Analysis

An entrepreneur needs to know how the market is doing to measure the success of a business. If the entire market, industry, or economy is not doing well, low profitability might be relative.

Big businesses, on the other hand, are constantly comparing themselves to the competition and industry averages to understand how they are doing. This applies to small businesses too.

This analysis may help in understanding what different approaches to take to remain relevant in the market.

Conclusion

The importance of reviewing financial performance cannot be overstated. It is the single most important task you should be doing as a business owner, bar none. By optimizing your performance and reviewing what is working and what is not working, you will be able to know the direction to take. Nothing can help you navigate your small business journey more than knowing where you stand financially.

Now that you have a better understanding of how to properly track the financial performance of your small business, don’t let it get lost in the minutiae of your day-to-day operations. Remember, this financial report is your best means of measuring how well your small business is doing. Review it often and keep a close watch on how it’s performing. This will allow you to adjust and grow accordingly, allowing you to capitalize on opportunities that would otherwise pass you by!

In conclusion, the benefits of regular review of your business are immense and is a key factor in the long-term survival of your business.

We can help with setting the right platform to help review your business.