How To Create A Financially Stable Business: Two Experts Discuss
by Michael Burdick, on Jan 16, 2017
As a small business owner, the concept of financial stability might sound like a far off dream but it doesn’t have to be. We got into the brains of two Paro employees with years of finance experience in the hopes they could lead us in the right direction. We posed the question: What is the most important step a small business can take to become financially stable? Their answers can guide you along that quest. Here are a couple of their suggestions:
Dan Wywrot - Co-Founder at Paro
From Dan’s perspective, the first part of your strategy should be to calculate the margins (i.e. “your take after costs”) of your product or service. He recommends keeping close tabs on both your gross margin ([Revenue - Cost of Goods Sold] / Revenue) and operating margins (Net Income / Revenue) over time, as well as understanding the fluctuations month-to-month. As he said, “For every dollar that comes in, I want to know how much that dollar is going to cost me and how much of it I get to keep. Check that you have healthy gross margins and an idea that you can sustain, otherwise you won’t have any money to pay for anything, or anyone, like yourself.” With this advice, you can ensure that your business model is viable from a cash flow standpoint.
Keeping tabs on your margins forces you to examine your business’s overall performance. Red flags to look out for: Losing money every month and/or stagnant growth. While you may love what you’re doing, the market might not. If your business isn’t growing month over month, it might be time to pivot or at least tweak your idea into something more sustainable and profitable.
Kody Myers - Business Analyst at Paro
Kody approached this question slightly differently than Dan, but came to a similar conclusion. His first step is to make sure that you have an accurate and insightful accounting system in place. Kody said, “Once you look at what is actually happening to your financial stability, you’ll understand where your money is going and why it’s going there. You’ll view your actual financial performance in a meaningful way, which will support forward-thinking and planning.” In other words, in order to actually grow your business, you have to truly understand how your business functions from a cost standpoint.
In Kody’s opinion, if you don’t understand where your money is going, you can’t know if your business is scaleable. One metric Kody suggests paying close attention to is the ratio of your customer acquisition costs (CAC) to lifetime value (LTV). This will tell you how scalable your business is and lets you know that for every X dollars spent on acquiring a new customer, you will get Y dollars in gross profit returns from that investment. Taking the time to deep dive into the costs of your business will give you insight into how your business ticks, leading you to making educated business decisions without wasting time and money. Kody breaks this down in more detail in his blog post: 4 financial metrics your business should track.
Tracking and updating your KPIs regularly establishes healthy habits, setting you up to make fast, educated decisions that are best for your business. If you're following the trends of your KPIs every month or quarter, you’ll always have a pulse on the health of your business, empowering you to focus on opportunities to improve. When you have a small business, your employees will always have an interest in the business’s success; therefore, showing them the business’s KPIs keeps your team and other stakeholders in the loop. Keeping all parties informed of the current status and direction your company is heading will create loyal employees and happy investors.
Financial stability might feel like an unachieveable feat, but with the right team and strategy, you can most definitely get there.