Financial goals for a small business may involve achieving an attractive profit margin or reaching a specific tangible objective such as saving enough money to buy a particular piece of equipment. Whether financial goals are numerical or tangible, they should be specific enough that business owners can clearly determine whether or not they have achieved them. These are called “SMART” objectives:
S – Specific
M – Measurable
A – Achievable
R - Relevant
T – Time required
Profitability is the most basic financial goal of every small business. Profitability involves earning more revenue than you spend on the cost of sales and operating expenses. Operating expenses include payroll, rent, materials, vehicle expense, advertising, utilities, interest payments, licenses and taxes.
Profitability goals for a small business should be sufficient to pay for the owners’ salaries and to enable the business to generate money for expansion or capital purchases.
Cash flow accounting represents a company's ability to maintain enough operating capital to cover basic expenses. Because of seasonal fluctuations and lags in payment due to billing arrangements, many businesses are unable to cover their cash flow needs strictly out of sales revenue and must secure some form of business financing such as a business line of credit. Cash flow goals may involve setting limits to financing incurred for off-season operations or designating time frames for paying back financing amounts.
There are many ratios used by lenders and other financial tracking organizations, however the two key ratios that banks primarily look at are the: a) Current Ratio, and b) Debt/Equity Ratio.
Current Ratio – This is a measure of a business’s solvency and ability to meet its financial obligations. It compares the Current Assets on the balance sheet to the Current Liabilities as a ratio. Typically, a ratio of 2.0:1.0, or higher, is acceptable.
Debt/Equity Ratio – This is a measure of a business’s level of borrowed money (debt) to the amount invested by the owners, or earned from profits, (shareholder’s equity). It is useful for banks to see this ratio to consider what effect a change in interest rates or loan payment would have on the business. This ratio compares the businesses total debt (Current and Long-Term) to Shareholder’s Equity. Typically, a ratio of 2.5:1.0, or lower, is acceptable