"The Importance of Financial Literacy for Entrepreneurs 🧑🏽💼💳"

The best way to tell how a business is doing is to look at the flow of money around that business. Money in a business is like blood in the human body. You can tell what is dying by how it is flowing. If more money is moving out than is coming in, then there is a problem.

Accounting is not a very exciting subject, but every business owner needs to know how to do it. Entrepreneurs don’t need to have in-depth knowledge of accounting. Instead, they need to understand the basics of interpreting financial records in order to spot things that are sometimes hard to see. Let me explain.

A business can be hot in the marketplace and have a huge amount of cash flowing in, but be on the edge of bankruptcy. Debt, interest rates, and overhead costs are all factors that could contribute to this. If business owners can't figure out the numbers, they can't make the changes they need to, which puts their businesses at risk.

Accounting ledgers can be complicated. But a business owner needs to keep an eye on seven parameters to figure out how well the business is doing.

1. Debt repayment

When a business takes on debt, they have to constantly service it based on the terms under which the debt was taken. The amount of money a business has to pay monthly to service its debt is very important to any business. Businesses often go into debt for something that has a direct impact on revenue. If revenue is not positively impacted directly, then there is a problem on the horizon.

This first parameter is about the amount of the monthly repayment of the debt. It can be disguised and broken up into many forms in a financial record. But you need to find them all and add them. You need this number. It is what keeps a business on its toes.

This is not about adding up the actual debts of a business. The actual debt doesn’t matter as long as the business can afford the monthly repayments. Also, you must not forget to factor in the interest on those debts. If you are not working as an accountant, a rough estimate might be good enough. This figure will be compared to other things.

2. Cash inflow

The next thing you want to know is how much money is coming in. And this is not about money coming from investors or loans. This is about money coming in from the sale of products or services by the business.

Forget about the deductions at this point and just focus on the gross income flowing into the business organically. This is about the actual payments the business is receiving. This is not about a payment that is coming in the future. It is about the payment received in real time.

Some businesses try to hide this parameter so as not to face the fact of how much is actually coming in. Entrepreneurs like to be optimistic and often add some kind of future payment to this number. Meanwhile, the cash inflow is about money that has come in and not money that is promised. Even if products have gone out, the value of those products is not added to cash inflow until the money actually comes in.

3. Recurring Expenses

Recurring expenses are expenses a business has to keep making to keep it running. An example is staff salaries. Another example is the cost of raw materials (if the business makes products). There are several costs like this in every business.

There are also fixed expenses, but those are expenses that are made once and don’t have to be made again and again. That really doesn’t matter to the health of the business. But if there is a decision to have fixed expenses regularly, then it has become a recurring expense.

The value of debt repayments and recurring expenses must be much less than the cash inflow. If the gap is close or exceeds the cash inflow, that is a sign of trouble. This is because taxes haven’t entered the equation yet.

4. Taxes

This needs no special introduction. It is an offense not to pay taxes, so you have to do it. Unless you have become a big, sophisticated business that can make deals with the government, you have to pay taxes the usual way. And there are all kinds of taxes based on the country you are in.

You must regularly determine how much money a business pays in taxes. This is also a form of a recurring expense, but it is different because it is a government-mandated payment. Taxes are arguably the greatest expense for businesses. And a lack of insight about taxes is going to end any company's problems.

The reason to look at the tax numbers separately is to know whether the business knows what they are doing concerning taxes. Are they paying too much tax or evading it? The entrepreneur needs to know this. There are tax incentives in the economic system of every country. If a business is qualified to take advantage of one and they are not taking advantage of it, says a lot about the competence level with which the business is run.

5. Margin per unit

This is how much you make on a unit of product or service. And it's easy to figure out: just take the selling price and subtract the cost of making that unit. In other words, the margin per unit is how much value you are adding to one unit of what you offer to the marketplace.

Assuming you get the raw material (per unit) for $20 and the cost of production (per unit) is $20. and you sell it for $50. This means your margin per unit is $10. And that is a very bad margin, except that the business is one that thrives on transaction volume. The reason for this is that taxes will deduct $10 from it. Also, debt repayment will benefit from it. That is, after making all necessary payments, you may not have much profit left.

The example above is a 20% margin. That is $10 divided by $50 and turned into a percentage. A 20% margin is not good enough. For most seasoned investors, a good margin begins at 60%. And you should know that there are businesses that operate on margins as high as 90%. The higher the margins, the better the business (as long as people are still happy and able to pay for it).

6. Retention rate per customer

This is basically how often a customer buys again. Beginners think business is about products and services. But those who have been in the game for a while understand that business is about customers. It is about how many customers you have, how much they buy from you, and how often they buy from you.

Different businesses have different structures for their businesses. Some have corporate clients that buy from them. Some businesses sell directly to consumers. Some sell to institutions that then sell to consumers. But for every structure, there is an expected retention rate. If customers buy once and don’t have to buy again for a long time, it is a very bad business model. This is why tech companies that make gadgets that people are not supposed to replace in a few years are making things that consumers are buying from them multiple times within a year.

How long does it take the average customer to buy again? This would tell you how much the business is keeping an eye on the customer. Customers or clients who frequently return to buy from a good business. A business where this rarely happens requires serious improvements.

7. Customer timeline value

This is about how much the average customer is spending on the business over a specific timeline. If the timeline is a month (as an example), this is about how much the average customer spends on purchases in that one month. More is always better.

Depending on what the business is offering to the marketplace, this value can vary from business to business. Things considered good for one business can be very bad for another. But this is one of the areas where great decisions that improve a business arise.

This is also referred to as ‘customer lifetime value’ in other contexts. But ‘timeline’ is used here instead of ‘lifetime’ to give a definite parameter to measure against. Measuring against time is an efficient way to assess a company's health.

As you can see, net profit is not included in the list. People prioritize it way too much. But it doesn’t really tell you what is going on in the business.

In conclusion, it is important for any business owner to keep a close eye on key parameters in accounting ledgers. Savvy entrepreneurs are so good that they can spot impending problems in any financial statement at a glance. By keeping an eye on these metrics on a regular basis, business owners can make sure their businesses are financially healthy and make smart decisions for future growth.

As a call to action, entrepreneurs should consider setting aside time each week to review their accounting ledgers and stay on top of these key parameters. Also, they might want to hire a professional accountant to help them make sense of their financial data and use it to move their business forward. With a strong focus on accounting, entrepreneurs can lay a foundation for success and build a thriving business for years to come.