When looking at the financial growth of your business, there are three key data points to keep your eyes on. These reports will tell you whether your business is growing correctly, too quickly, or not at all.
The equity of a small business measures the worth of its assets against the weight of its liabilities. As a business owner, you are responsible for all liabilities and debts the company accrues. You also hold the rights to all assets the company accrues. These assets can be tangible, such as equipment, buildings, etc. They can be intangible, such as copyrights, branding, etc.
When your assets outweigh your liabilities, your equity goes up. This means that the value of your company, as well as yourself, goes up. However, as you gain more liabilities, and the equity of your company drops, so does the value of your business.
If your company is owned by more than one person (partnership or otherwise) this will also affect the equity, as it and the liabilities are shared. If the business has a single owner, all equity flows through that owner. But when there are more than one owner, the equity is divided among the owners, based on their investments.
These values should be tracked on a balance sheet, and reported on a regular basis.
Liquidity is the ability of a company to cover its short-term and long-term obligations. This includes paying vendors and operational costs. This can be measured by the current "liquid" assets (cash, investments, and AR) divided by the current liabilities for that term. This gages the companies ability to pay off these short-term debts, and know if the company is in healthy condition.
The liquidity of a company is important, because it acknowledges accessible funds. It is also important to let creditors determine the worth of your company, and secure credit it needs.
Managing liquidation can be done by watching overhead expenses, such as rent and utilities. Minimize assets that are rarely used, and are not generating profits for the company. Negotiate longer payment cycles with vendors, to keep short-term debts manageable.
The liquidity of a company directly affects the equity of the company, as it impacts the liabilities and assets the company keeps.
Every company should have Key Performance Indicators (KPIs) used in measuring and tracking the success of the company. One of the biggest KPIs to measure, is the efficiency of the operations. These can be measured by looking at several factors:
Machine Downtime- unexpected downtime due to bottlenecks or unusable assets increases costs, while halting production. This can cause missed deadlines, and lost profits. Avoid this by scheduling regular maintenance checks and scheduling maintenance activities in advance, to better prepare for downtime. Communicate with employees, and encourage open communication about downtime-related issues.
Capacity Utilization- When a machine can produce more of a product, at higher rates, production can be scaled to match it. Measuring the capacity of production can tell you if a machine, or team, can be producing more, or is slowing down, do to producing more than capable, in a time frame. If production slows down, the efficiency of the operation will drop. Keep service records, and update machines and training as needed, to keep capacity utilization at 100%.
Yield- While mainly measuring the quality of the manufacturing, yield can directly impact the overall efficiency of production, as well. When the quality of a product depends on potential reworks, recalls, or scrapped parts, the efficiency of production slows down, during these processes. Companies should aim for total yield, and avoid rework and scrap. To manage this, develop early and late stage strategies, to reduce defects in production. Build prototypes for new products or upgrades, to identify potential defects before production begins.
These three key components are directly linked, and impacted by each other. Without efficiency in the operations, assets are lost, which means drops in liquidity and in equity. If there is an increase in liabilities, it could cause problems in production, thereby decreasing the operational efficiency. Keeping these three data points balanced is a vital factor, in growing any business, regardless of size.
Khoury, B. (2019, 09 5). Are We Operating Effectively. Retrieved from Manufacturing Extension Partnership: https://www.manufacturingsuccess.org/blog/are-we-operating-effectively-4-metrics-to-track-operational-efficiency
Washinushi, M. (2020, 11). Liquidity in Small Business. Retrieved from FreshBooks: https://www.freshbooks.com/hub/accounting/liquidity-small-business