There is one purpose of a business – to make money. But as good as a business, its purpose, its market, its price, nothing works unless you, the small business owner, are doing your job.
How are you doing with these key indicators?
- How good are you at turning your assets into profits?For this question, don’t assume that the textbook accounting definition of asset is going to work. You may have intangible assets such as a brand or intellectual property. You may have an expense that is really an asset. For example, in a service business, your asset may be your employees.
- How good are you at turning those profits into income?In other words, can you control and minimize expenses?
- How good are you at turning that income into cash flow?
- How good are you at creating free cash flow? (Free cash flow is the amount that operating cash flow exceeds investment cash flow.)
- Now that you have all of that figured out, what will you do with the free cash flow? You could (1) reinvest in the business, (2) repay debt, or (3) distribute to owners.
If you have accurate financial statements, you can measure how you’re doing on each of these steps. The better you are at each of these steps, the more money your business will give you.