Reasons why small Businesses should pay attention to sales cash

Business owners tend to overengineer their accounting without first analyzing the relevance of the data. As a business grows more complex, there can be too much information, which can make it difficult to make quick and meaningful decisions.

To distill this information into useful, actionable data, a business can rely on key performance indicators (KPIs). KPIs can help a business quickly identify relevant information needed for decision-making.

Reasons why small Businesses should pay attention to sales cash
Reasons why small Businesses should pay attention to sales cash

For small businesses with less than $500,000 in sales and without external investors, the most important KPIs to track are sales and cash flow. While other metrics might provide meaningful information, they rely on a well-functioning accounting system, which some small businesses don’t have. The following points will show small-business owners why sales and cash flow provide adequate information to run their business.

Why Sales?

Sales is the lifeblood of a small business. Unlike venture- or investor-backed businesses, small businesses rely on the cash coming in the door to pay their bills. A drastic change in sales can mean a quick shift from profitability to losses. Conversely, it can lead to fulfillment issues if growth is too sudden. Luckily, most business owners know where their sales come from and the importance of sales to their business. Any rudimentary bookkeeping system will track sales, and thus this information is readily available to the business owner. In the absence of a bookkeeping system, sales can be calculated quickly by looking at deposits in the bank account or reports from a shopping card or point-of-sale system.

Why Cash Flow?

Profit is typically the gold standard by which businesses are measured. However, for small businesses, this profit number can be misleading. For example, sole proprietorships do not count payments to owners as a wage expense, and thus this amount is omitted from profit. The same omission is present for S corporations and partnerships. A better alternative is cash flow—specifically net cash flow, which is the amount of cash that the business receives or uses in a certain time period. Even if your bookkeeping is nonexistent, this amount can be easily calculated by looking at the change in your business checking account balance. While this amount won’t tell you your taxable income, it will tell you how much cash has been generated by the business, which is just as important.

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