To ensure a successful future for your small business, planning ahead is essential. Building a financial planning & analysis (FP&A) process can help put your business on the right path.
Terms to Know
Your business’s FP&A process should include key metrics for monitoring success. Here’s what to consider:
- Revenue growth rate: This is how much your business’s revenue grows year-over-year. To calculate it, take your current revenue and subtract your previous revenue. Then, divide that amount by your previous revenue. A growth rate of 5 to 15% is average for mature businesses.
- Gross margin: This is how much your business profits after accounting for direct costs. You can find this metric by subtracting your costs of goods and services from your revenue, then dividing that amount by your revenue. A business’s average gross margin ranges from 40% to 80%, depending on its industry.
- EBITDA margin: This indicates how well your business is operating by showing how much revenue goes toward operational expenses. Divide your EBITDA by your revenue to calculate this metric. A margin of 15% to 25% is standard across most industries.
- Operating cash flow: This is how much cash your business generates from regular business operations. To find it, subtract your cash outflows from the amount of cash brought in from operations. While there’s no standard number for this metric, it should be positive for businesses that have been open for some time.
- Cost of revenue: This is how much it costs your business to produce its goods and services. It’s determined by looking only at your business’s direct costs. The average cost of revenue is another metric that depends on a business’s industry.
- Burn rate: This term, specifically for startups, is how much a business spends each month. A business owner can find it by dividing their total expenses by the number of months those expenses were for. This metric tells a startup how much revenue they need each month to stay above water.
Helpful Hints
There are several factors that can help your small business build a smooth and efficient FP&A process. Some steps to start with are:
- Keep all financial data in one place: To measure the process’s success, create one space to monitor all of your business’s metrics.
- Automate your business’s metrics tracking: Instead of tracking metrics in a spreadsheet yourself, use a digital platform to create automated reports for you.
- Evaluate your business’s spending: Your business might be paying for products or services that were useful before but aren’t anymore. Check if there are any expenses for software tools, subscriptions, and expensive contracts that you don’t need any
- Think ahead about potential financial outcomes: Use what-if analysis to predict how different scenarios could affect your business’s finances before they happen.
An effective FP&A process can help you save your small business money, stick to its budget, make quicker decisions, and be more transparent with your team. Taking this step now can make a big difference for your business’s future.
The information for this blog was provided by Aleksandar Stojanović, Fractional CFO, FP&A Advisor, Speaker, and Author at Fiscallion. For more information, visit https://fiscallion.io and https://thestartupfinance.com.