You have just started your company and brought in your initial set of customers. There are good chances that you are finding it difficult to assess if your start up is doing well financially in the initial months or showing early signs of trouble.
A simple online search could provide you numerous methodologies to measure the financial health of a company but most of them are analytics out of your financial statements. But, You need to maintain your books properly to even consider using these ratio analyses.
A proper investment of time and resources to maintain the books is absolutely critical; not just to make informed decisions but also to seek further financing.
The company should not let more money leave the business than what is coming in. Cash is really the king! Your expenses should not grow at a rate higher than the income growth. The founder should ensure availability of cash to meet its daily operating expenses and also save for the rainy day!
- Start analyzing your business each month.
- Build a revenue and expense budget for the month with the current visibility and see if you are meeting it. Understand the variances and try to refine the budget process.
- Don’t look at the profitability of the company as a whole, but break it into individual revenue generating units to see where you gain or lose money.
Make sure you don’t exhaust any source of emergency funding. You need to have at-least three months of payroll saved at any point in time. People are the actual assets of the company! Try to understand your cash leeway – how long you could survive with your current resources. It would help you understand if and when you need to raise money further.
Once you get a hold of your numbers game in the initial months, you can look at the various ratios which would give you more insights. But you need to learn how to read the financial statements – it can’t be just left to the accountants or your temp-CFO.