Numbers dance around business owners’ heads all night long. How much do I need to make payroll this month? When will I run out of inventory this month? What will my tax bill be when April hits?
It’s no surprise that keeping track of those ever-changing numbers is a job unto itself — small business owners are often the CEO, sales department, accounting, marketing, business development, and sole employee all in one. Juggling all of those roles can make it tough to keep your head on straight, let alone remember the essential numbers that mean life or death for your business.
Here are five core business financial health numbers that can help you get a quick sense of the state of affairs — no MBA required.
1. Your Personal Credit Score
You’re a business owner, but that doesn’t mean that your personal credit doesn’t matter anymore. Business owners continue to leverage their personal credit score for business financing, credit cards and insurance years after starting their business. And you don’t need to pay hundreds of dollars a year to monitor your credit — there are more than 150 sites and tools you can use to monitor your personal credit scores for changes and get alerts when something major happens (check out the full list here).
Why it’s important: Your personal credit score can help you access financing when you need it — and you need to monitor it regularly so you’re not out in the cold when you actually do need it.
2. Cash Flow Buffer Days
If disaster struck tomorrow and your business came to a screeching halt, how long could you continue to pay your regular bills and survive without any incoming cash flow? It’s a dark scenario to consider, but it’s vital to understanding the financial health of your business. It’s also a number that new business owners often ignore because they haven’t set up a business bank account to keep their personal and business finances separate.
According to a JP Morgan Chase Institute study, small businesses have an average of 27 cash buffer days (industry-specific averages can vary though). Even more terrifying, 1 in 4 businesses have less than 13 cash buffer days. Knowing your runway can help you spend your time wisely. If you have 60 days cash in the bank, you can extend net-30 terms to clients and customers without worrying about a cash crunch, for example. If you have less than 5 cash flow buffer days, however, you may want to spend your time making sure customers with unpaid invoices are contacted or that you can find financing like a business loan or line of credit that can help you survive until those accounts are paid in full.
Why it’s important: One of the top reasons businesses fail is because of cash flow problems. Don’t be one of them.
3. Your Business Credit Score
Your personal credit score can help you access financing in a pinch, but then you’re on the hook for that debt if the business goes under or you’re late making payments. Your business credit score, however, can help you protect your personal credit and access financing, loans, and more. Business credit scores are based on the data in your credit files at the major commercial credit reporting agencies — Experian, Dun & Bradstreet and Equifax. This data includes tradelines with vendors and suppliers, business credit cards, business lines of credit and loans, UCC filings, judgments and much more. You aren’t entitled to free annual business credit reports like you are consumer credit reports and the information is available to anyone willing to pay for the full report from the bureau. For example, you can buy your business’s credit report and your competitors’ reports as well. You can also see your business credit data for free with services like Nav.
Why it’s important: The lowest-APR business loans require a business credit score, but it takes time to establish and build good business credit.
4. Debt Service Coverage Ratio
This sounds like a pretty wonky term, but it can be the key to understanding how lenders see your financial health. Remember that “cash flow buffer days” stat you need to understand? This is like the sister stat to that one. There are several ways to calculate it but at the most basic, it’s your net operating income divided by your debt payments. Debt service is the amount of debt payments you’ve paid throughout the year or will pay in a given time period (month or year). In a nutshell, this is similar to the debt-to-income ratio used in underwriting many consumer loans.
Why it’s important: Your DSCR is a good number to have handy for understanding your debt load and the impact it’s having on your business. Too much debt can cripple your cash flow and also make your business a tough sell for potential lenders or investors.
5. Annual Revenue
It may seem like common sense, but you’d be shocked to learn how many people don’t know their business’s annual revenue. If you’re focusing solely on the money you’re spending and not on the money you’re earning, you’re halfway to business disaster. It’s also a number any investor, lender or potential new partner will use to gauge potential growth for your business. (Ever watch Shark Tank? One of the first questions the Sharks ask is, “What are your sale?”) If you can’t recite your annual revenue for this year and last year from the top of your head, your legitimacy as a business boss can easily come into question.
Why it’s important: Annual revenue can be the main determining factor in how much credit lender will extend to your business. If you’re expecting a $200,000 SBA loan, but only brought in $60,000 in revenue last year, you may need to reset your expectations.
About the Author:
Gerri Detweiler serves as Education Director for Nav, the first site to give business owners free personal and business credit scores and tools to build financially healthy companies. A prolific writer, her articles have been featured on popular websites such as MSN Money, Forbes, AllBusiness.com, The Today Show website and others.