Six Essential Monthly Accounting Numbers Every Business Owner Needs to Know (& Where to Find Them)

It seems like Revenue and the cash balance are the first (or only) two numbers most business owners look at on a regular basis. What they don’t realize is they are missing so many other important areas to pay attention to. No one would set out on a long trip just looking at their speedometer (gas gauge anyone?), yet those same folks miss out on the wealth of information available in other areas of their financial system. There are several more gems we can glean by digging a little deeper- here are 6 of them.

Gross Profit / Margin – Income Statement

This is probably the best indicator of business health. A business with healthy margins has a huge advantage over one with lower than industry norms. A company reporting a healthy gross profit percentage typically will have good cash flow, adequate reserves, and well-designed processes. The inverse is true for firms with lower-than-average margins. We often tell our clients that if they are missing the mark on margin, there is little chance to “cut” their way to profitability (i.e. it is very difficult to reduce overhead enough to make up the difference). Our clients are constantly amazed when we illustrate what a small increase in margin will do for the bottom line and cash flow. Think about it- the work has already been done so costs don’t change. But if the margin was just a few percentage points higher, 100% of that increase hits the bottom line and the bank account.

A company reporting a healthy gross profit percentage typically will have good cash flow, adequate reserves, and well-designed processes.

Duplicate, Excessive, or Unused Expenses – Income Statement

Scope-creep often happens in professional service engagements; the same is true in overhead expenses. Too often automatic renewals get overlooked, higher than normal price increases are missed, and old equipment stays on the bill despite not being used anymore. Years ago, I was shocked to discover Lucrum’s copier contract auto renewed at an 8% increase each year! We quickly got that down to 4%. Another client had lost several Verizon data hotspots and phones in a drawer that were still on the bill each month. Just deactivating these items saved over $125 each month! Another client is renting an entire floor in anticipation of growth but due to everyone wanting to work from home they are now trying to sublet that extra space. Yet another found he was paying for SiriusXM subscriptions on a truck they had sold to someone else and another sold to an employee! In reviewing his Sirius XM subscriber list, the client even made the comment, “Hell, I barely listen to it anymore. I’m on the phone all the time and listen to podcasts when I’m not” In each case, a critical review of the Admin Expense Detail report resulted in a significant savings in several categories.

Customer Deposits vs. WIP + Cash on Hand – Balance Sheet

One area we focus a great amount of attention with any new construction client is to ensure that their Work in Process plus cash on hand always exceeds the balance in the customer deposit account. Think about it, if the cash on hand plus the work done to date does not equal or exceed the balance due back to customers, how can the jobs get finished? The only way is “borrowing” future deposits to finish old jobs which is a spiral we don’t want to get in.

Years ago we had a custom homebuilder who had underbid some jobs and others took longer than expected. The result was his margins got compressed and he barely broke even on those jobs (remember the above point about margins?). With overhead still to be paid, he got in a cash crunch and pretty soon was relying on deposits from future jobs to finish the existing ones. This is a very slippery slope and one we want to make sure to avoid.

Monthly Debt Service – Balance Sheet

Most business owners understand debt is a tool that they use as leverage for growth or to preserve cash. They also understand that any debt is a claim on future profits. What many fail to understand or analyze is how much revenue (more accurately, profit) needs to be generated from a new addition to the fleet. Smart business owners know the true value of any asset is how much cash it can generate. We recommend doing the analysis ahead of time to make sure the investment in the new machine is going to generate sufficient returns after debt service.

We also see many business owners forget to include Debt Service in their break-even analysis. It’s great to know the break-even point from a P&L standpoint but since principal payments are not included on the Income Statement, it’s not the most accurate number. We prefer a cash flow break-even calculation to ensure that the business owner knows how much work they need each month at X margin to ensure they cover all of their cash requirements, not just the ones on the Income Statement.

Many fail to understand how much profit needs to be generated to cover a new addition to the fleet

3 Categories of Cash Flow – Cash Sources and Uses Report

Download Sample Cash Summary

This isn’t one of the standard reports that comes pre-loaded in Quickbooks or that we learned in Accounting 201. Lucrum created this report years ago when we had a client complaining about poor cash flow. Using some other reports and lessons we’d learned; we separated the client’s activities into three buckets and put a different spin on the standard Statement of Cash Flow report. We think it’s more aligned with how business owners think vs. the GAAP approved Statement of Cash Flows. Since it’s a custom report, we’ve shared an example in the link above to use in following the discussion below.

Rather than start with income like the GAAP report, we start with the cash balance at the beginning of the period (usually month). Activities are broken into three categories: Operating Cash Flow, Financing Cash Flow, and Owner Cash Flow. The final line at the bottom is ending cash balance. By breaking it out into these three buckets, we can clearly illustrate where cash is coming from and where it’s going. We always want Operating cash to be a positive number. If that number is a cumulative negative, there is likely a serious problem that needs to be investigated. Sometimes we can see that Operations is generating a healthy flow, but Debt Service is too high. Then we can look to maturity dates or payoff timing or identify assets to sell/refinance. One former client complained his medical practice wasn’t making any money; the Owner section showed he had saddled the business with all his lifestyle payments which was the reason for “poor cash flow.”

Accounts Receivable / Retainage Receivable – Balance Sheet

We know that only contractors have retainage but since it’s very similar to regular accounts receivable, we included it here. Too often we see business owners focus on the total A/R balance on their books and make a comment “If only we had that money in the bank.” While it’s fun to daydream, it’s not realistic. It’s never going to happen. Smart business owners DON’T want their A/R to be zero; it would mean they are out of business. What’s more important is staying on top of A/R and making sure every customer is paying on time (or preferably, early). We regularly see clients letting some customers go 60 days with little more than a phone call. Instead, identify who on the team is responsible for A/R and develop both a process and a script to make calls gradually escalating the pressure until paid. It’s not scaring or threatening the customer; we’re helping them solve a problem. And it’s better to know early if we’re not going to be paid than to keep working and make the damage that much greater.

The same goes for retainage. Fight to make sure it gets released according to the contract and push for it as soon as it’s due. OR work out another plan; one contractor we know got a GC to agree to keep 10K on retainage but pay all bills in full after that. After all, retainage represents cash that has already been earned and taxed; it simply moves from the retainage receivable account to the bank account.

If you’ve made it this far, congratulations! Most folks’ eyes have glazed over by the end of the first report. This is what we do all day long, and if you need help in your business reach out to Lucrum today for a free consultation. We can help you lead your business with confidence.