Stay Smart: Financial Analytics is Critical For SMBs

While everyone dreams of owning a flourishing business, running it successfully is a daunting task. No matter the scale of the business, small or large, maintaining profitably takes a toll. As per the statistics published by the Bureau of Labour Statistics, about 20 percent of small businesses fail during the first year of commencement. More so, in about the fifth year, almost half of them lose the race. 

To begin with, challenges related to finding the right business loan for a startup to actually getting things on the ground like getting work on-time, employee retention, maintaining working cash flows and retaining clients take a toll on businessmen. However, the greatest of these issues is financial mismanagement. Small businesses lack the prowess to manage their funds and track their transactions on a daily basis. Further, ensuring continued sales and maintaining profitability becomes difficult.

To deal with this, data analytics has become essential to have a competitive edge over others. For this, huge quantum of data is leveraged to monitor key financial parameters and understand the trends. However, most businesses lack the expertise to understand the financial techniques. To make things easier, here is a list of basic financial analytics that will make a business successful.

Key financial analytics for small business

Cash flows analytics: Planning and monitoring of cash flow are essential for running a small business successfully. The inherent advantage of dealing with small businesses is that you tend to deal with a small number of transactions that can be monitored easily without any external help. However, to manage the same, the key components of the cash flow statement has to be understood. 

To begin with, the cash flows essentially include the operating revenues, expenses and financial inflows and outflows. In short, any transaction that has an effect on the existing cash balance is included under the cash flow statement. Operating revenues are mainly the income earned from the sale of service or goods that the business offers. On the other hand, expenses are the cost that is incurred during its course. Other than this, gains or losses made by selling an asset (land or capital asset), depreciation of assets, expenses incurred and cash inflows or outflows from investing or financing activities are accounted under the statement. 

For monitoring these items, quick invoicing by using online invoicing facilities, clearly setting up payment terms, monitoring losses and tracing all shortcomings is required. Apart from this, investment in financial management software would analyze cash flows with relative ease. A pictorial representation through charts and graphs available through the software helps skim through business trends. 

Predictive sales analytics: Sales revenue is the lifeline of any company. Knowing how much sales business would generate monthly, quarterly or yearly has important tactical and strategic implications. For this, predictive sales analytics is a perfect tool that would allow small business companies to understand how much sales they would generate. It is a technique through which data is mined to extract key information and use the same to generate trends about past sales activity. In order to do the same, methods such as studying past trends, or using predictive techniques such as correlation analysis would come handy. Proper sales prediction helps manage peaks and troughs in business and plan accordingly. 

Profitability analysis: Differentiating between clients that generate profit and those that make you lose money is important. To understand the same, small business owners need to know the 80/20 rule as per which 20 percent of clients are those which generate 80 percent of the profit and 80 percent of customers account for 20 percent of your costs. Therefore, understanding the profitability of a certain group of customers would provide an insight into how to make a profit. For instance, knowing how a particular customer made their first purchase whether through an advertisement or online medium would provide a roadmap of future marketing strategies.

Product matrix analysis: Having a line of products on the shelf is a good idea, but at the same time, understanding which one is the best selling and where demand is at a lower end would help make a differentiation. In this way, efforts can be channelized towards those products that are highly profitable rather than looking at a business as a whole. To do this, each product and service has to be analyzed individually. For this, a reliable and fair way to apportion cost is required. 

Conclusion

For financial management, thankfully small business does not require a whole gamut of things such as expert team and other software. With a little knowledge of finance and the ability to understand trends for the day-to-day management of operations would come in handy. By gaining prowess over such analytical abilities and devicing strategies to focus less on loss making products would succeed in the long-term.