Understanding revenue (recurring vs. one-time) and expenses (fixed vs. variable) is key to assessing business health. Profitability boils down to revenue minus expenses. We can delve deeper by evaluating: Revenue trends, profit margins, concentration risk, cost management, and profitability ratios.

By analyzing these factors, we can assess a business's ability to generate profit and identify areas for improvement.

For more, check out this blog post!

Profit tells you if a business makes money, but cash flow reveals when that money comes in and goes out. A healthy cash flow ensures a business has enough funds to operate and grow.

We can assess cash flow by looking at its three categories:

Operating Cash Flow (OCF): This is the cash generated from core business activities (sales, expenses, payroll). 
Investing Cash Flow (ICF): This tracks cash used for long-term assets (equipment, investments).
Financing Cash Flow (FCF): This shows how a business raises or repays capital. 

By evaluating these components, we can assess a business's ability to manage cash flow and ensure it has the resources for future success.

See this blog post for more information!

Businesses use financial leverage (debt and other financial instruments) to potentially increase the returns their business generates. Leverage acts like a lever, where a small input can yield significant results, but magnify risks.

There are two main debt types:

Long-Term Debt (1+ year): Used for long-term investments like property (more flexibility for repayment).
Short-Term Debt (< 1 year): Used for day-to-day operations or unexpected expenses.

The key is finding the right debt balance. Too much debt can be risky, but a good strategy can accelerate growth.

For more information on financial leverage, including how much debt you should ideally have, check out this blog!

Operational leverage analyzes how a company's cost structure, specifically the balance between fixed and variable costs, impacts profits.

Fixed Costs: These remain constant regardless of sales (rent, salaries, insurance). They create a baseline expense that must be covered even with low sales.
Variable Costs: These fluctuate with sales volume (raw materials, commissions, shipping). As sales rise, so do variable costs.

The Degree of Operational Leverage (DOL): DOL measures how sensitive a company's operating income is to sales changes. A higher DOL signifies a greater amplification effect on fluctuations in profitability based on changes in revenue. 

By understanding operational leverage, companies can make informed decisions about pricing, production strategies, and risk management to optimize long-term profitability.

We dive into operational leverage more in this blog! 

A well-functioning accounting system provides the foundation for smart business decisions, optimized profits, and achieving financial goals. Let's break down what we evaluate and where we frequently see issues with small business accounting. 

Accounting is the meticulous process of recording, classifying, analyzing, and interpreting financial transactions. This meticulousness ensures reliable data for analysis.

Here's what good accounting looks like:

Accurate Transaction Recording: Every financial exchange, from vendor payments to customer receipts, needs clear details like date, amount, and vendor information.
Vendor Management: Maintaining good records of vendor terms, including payment deadlines and discounts, is crucial. Streamlined recordkeeping simplifies these processes.
Open Communication: Regularly share financial reports and discuss any concerns with your CPA, CFO, and finance team to ensure everyone's on the same page.

By prioritizing good bookkeeping practices and avoiding these common pitfalls, you'll gain the financial insights needed to make informed decisions, achieve your financial goals, and focus on what matters most – running your business.

Check out this blog for more information!