You’ll need all sorts of information to keep your small business operational and profitable. Instinct and luck may get you some success, but this is unsustainable. You’ll eventually encounter challenges that threaten the survival or competitiveness of your growing company. In such cases, you’ll need to rely on data to make decisions about the direction of your business, products in your portfolio, and marketing strategies. This is when net income ratios and other ratios become reliable details for making decisions. These ratios provide you with insights about the net income your company generates, liquidity, and other financial details.
These are some net income ratios and other ratios entrepreneurs should know about.
Return on Assets or ROA
The ROA ratio tells you how your business uses assets that turn into profit and sales. This accounts for all costs you incurred, including taxes and expenses. For example, the more assets your small business purchases, your potential to create profit is high. You compute this ratio by dividing the net income you generate with your total assets.
Profit Margin Ratio
You have the option to measure your small business’ profit margin in a variety of ways such as gross profit margin, net profit margin, operating margin, and others. The net profit margin is a ratio you should look into as your small business grows. It shows how your business can generate a profit after deducting all taxes and costs. It can also tell you about the financial position of your company. This ratio enables you to determine whether your strategies and practices are working or not. It shows you where it’s possible to reduce costs and find ways to boost profit without sacrificing quality. Your small business may yield a high revenue, but your operating costs are cutting into it. Knowing the changes in your net profit margin enables you to pinpoint problems in your strategy and operations and address them accordingly.
Ratio for Cash Flow
Your small business’ cash flow is an important indicator of your capacity to get out of debt, pay dues on time, generate profit, and effective use of resources. Cash flow margin ratio allows you to determine how your business converts each sale into cash. You may have a high sales figure, but if it’s mostly uncollected accounts receivables, you may have insufficient cash on hand to purchase materials, pay for labor, market a product, and other similar expenses. You calculate this number by dividing cash flows from operating activities with your net sales. A high industry percentage shows how well your sales turn into much needed cash.
These ratios provide you with insights about the profitability and sustainability of your small business. You might think that your company is doing well because of huge sales. However, you may already have a tight cash flow and shrinking margins. You then incur more expenses just to earn a small amount. Reviewing your financial statements allows you to make the right decisions. You should have accurate and error-free information in your accounting books to achieve this.
You can’t compute net income ratios and other ratios properly, if the numbers you use are wrong or not current. This is when bookkeeping becomes important. Handing this task to an inexperienced employee can be disastrous for your small business.
The Problems with an Inexperienced Bookkeeper
Letting an inexperienced employee update your accounting books might lead to many mistakes. They may make wrong entries that change computations of your expenses, revenue, profit, and other important financial information. These have a negative effect on your balance sheet. Your small business might also incur penalties and additional fees for submitting erroneous documents. You could miss out on tax refunds and deductions because of mistakes in your accounting books. The additional money you may have saved could’ve been used for operations, paying debts, and reinvesting in your company.
An inexperienced bookkeeper will cost you more money because you have to train them and wait until they’re ready to do their job efficiently. This learning curve adds to your expenses and reduces your profit. You’ll need to spend your resources efficiently because you’re not drawing from a large account. Instead of using cash to train and correct the mistakes of an inexperienced bookkeeper, you could direct it to projects and investment to grow your small business and generate more profit.
Should You Outsource?
You already know the potential problems of doing bookkeeping on your own or delegating it to an inexperienced employee. Another option that you might be considering is hiring an in-house and full-time accountant. This approach is practical, but also comes with its own costs. Hiring full-time employees means you have to pay them and give them benefits. If your small business is running on a tight budget, the additional expenses of hiring more employees might put you in a difficult financial position moving forward. As you include salary and benefits to your computations.
A viable alternative is to hire an outsourced bookkeeper. Outsourced bookkeeping services provide you with quality work and accounting books with no mistakes in them. They have the experience and skills needed to update your books efficiently. They provide reports you may need and can provide recommendations if it’s part of your agreement with them. Their payment is hourly, per project or any type of arrangement you agreed upon. You don’t have to pay them more than what is in the contract you signed with them.
An outsourced bookkeeper can do bank reconciliation, accounts payable management, taxes, create financial statements, and other services you may need. The net income ratios you want to review will be more accurate when your accounting books are free from errors. This is why it’s advantageous for you to outsource bookkeeping.
Look for an outsourced bookkeeping company that offers first-rate and reliable services. We at Robookkeeper can provide you with both. We connect you with a team of experienced virtual bookkeepers that can update your accounting books within the deadlines you require. You can choose your package and we’ll start working with you immediately. We cater to your needs just let us know your requirements and preferred outsourced bookkeeping services.