Small and medium-sized enterprises, also known as SMEs, are businesses that can be recognized as startups, though not necessarily. To an extent, they are sometimes interchangeable, given the small number of personnel that work in SMEs. These are usually privately owned and run different numbers than larger enterprises or businesses. The cash flow and net income cannot be compared to businesses with larger personnel. After all, the inventory and sales differ completely and are on different scales. To understand the numbers of your small enterprise, you need to know what the available types of finances are. Read on below to discover some of those types. (Image Credit: William Iven/Pixabay)
Understand Your Cash Flow
The number that you need to know most is your cash flow. Cash flow is the total amount of money that goes in and out of your enterprise. It affects liquidity, which is the readiness of extra cash to be spent either on the business or other assets. Your cash flow should be enough to cover the expenses and taxes and provide you a decent profit. If you have a higher cash “inflow” than “outflow,” that means that your profit margin is higher. Your ROI (return on investment) is also higher.
In accounting, there is an important term you must know: depreciation expense. A depreciation expense is the money lost for the asset used. For instance, with cars, depreciation can occur with the mileage. The higher the mileage, the more your car’s price depreciates. When you count your net income, you calculate all the money coming into your business to know whether you are losing or gaining money over time. When you remove taxes and expenses, you get the total profit without taking the depreciation expense into account. You can use this Depreciation Calculator by online-calculator.
Profit or Gross Margin
Profit and gross margins are similar to your net income but it refers mainly to your merchandise. For instance, if your company creates handbags, then the gross margin is what you will get after subtracting the expenses of creating the bag from what you sold it for. Say you make it for 150 dollars, and you sell it for 300 dollars, then your gross margin is 150 dollars. There is the option of a small business expense tracking website that you can use to track all your expenses, and it will remove the tax prices from the margin for you. It will help you get a grasp on your actual margin on the off chance that the taxes on the bag are higher than you expected and the gross margin is miscalculated.
Of course, you must keep track of your sales with the help of sales software. Your sales are what will make or break your business. If you have all the items in your inventory, but there is no demand, then the predicament of a higher supply than demand will cost your business a fortune. Invest in your sales team, even if you have a small enterprise. If you want your enterprise to grow, and not necessarily in size, then the optimum solution is to focus on how you are selling your business regardless of whether it is a service or a product.
A lack of inventory contradicts the previous point. If you have a high demand and low supply, your sales go down anyways, even if your clients or customers want your service or product. If the number of items in your inventory decreases, then you have the missed opportunity of making your customers remember and prefer your brand. Always make sure that if you have a marketing and sales team, you do not invest more in them than your inventory. Unless you are sure that the product will reach your customers when needed.
In these trying times that we live in, it’s not easy running a business. This is why it’s so important to understand the value of numbers and how they affect your small enterprise. Understanding and creating your business takes months or even years. The idea of keeping track of all the numbers may sound difficult, but by delegating, you can keep track without stretching yourself thin. Nowadays, with new technology, you can also make use of applications and websites where you can input all the expenses and have the numbers ready in no time. With time, these applications can create an average income for the coming year by assessing the speed and direction that your business is moving. Do your research anyways, and be sure that you do not forget any expenses or taxes so that these tools can predict the outcome accurately.