Successfully scaling a business is primarily about managing your numbers effectively. There are several indicators you will want to look at as you scale your business to determine how effectively you are managing your numbers.
Cash Flow
Your working capital refers to your liquid assets that can be used to meet obligations. This not only includes cash, but can also include investments that are held in the short-term. Fortunately, it's easy to determine your working capital by subtracting your assets from your liabilities. For example, you might strive to have at least one fifth of your assets be working capital.
Your business may benefit from cash flow forecasting. Cash flow forecasting is an estimation of the amount of money that you expect to flow into and out of your business. This includes both your income and expenses. This is a very important metric because a business that does not have adequate cash flow will become insolvent.
Operating cash flow refers to the total cash that is generated by your business. The operating cash flow is focused on how much money comes in and out of your business functions. For example, if you hire staff to perform a service, you may have a positive cash flow when the revenue generated from these services is higher than the salaries paid to staff members. When determining the current ratio, you will want to consider liabilities that must be paid within a year. You must also consider assets that can be liquidated quickly.
Return on Investment
Your business will want to not only examine its return on investment, but also its return on equity and its return on assets. Whenever your business makes an investment, you will want to subtract the expenses incurred as a result of the investment and compare it to the profits generated by the investment. Your return on equity is the ratio of your net income returned from a shareholder's equity. The return on assets refers to the amount of profit you are able to generate from assets.
Because of the importance of finances when scaling your business, it's important to work closely with a business accounting service that will allow you to determine whether it is appropriate to scale your business and how much you should scale it. When all of these factors are considered, along with your gross profit margin, net profit margin, and sales growth, you'll have a full picture of the financial health of your business.
