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In an article entitled “The 7 Key Metrics Every Business Owner should monitor”, tells
that knowing these metrics will not just inform the business’ health but also monitor how these
metrics are performing on an ongoing basis. It also states that 28% of businesses fail due to
problems in handling financial structure of the company. There are a different metrics that
every business owner should know, including cash flow, accounts payable, accounts
receivable, direct costs, operating margin, net profit, and cash burn rate.
Basically, cash flow measures the flow of the business’ money, which are the inflow
and the outflows. Know that the money that goes out of the business is negative cash flow and
the money that comes in is a positive cash flow. But most important is, cash flow isn’t your
profit because profits and cash aren’t the same thing. Accounts payable is the total of the bills
that you have to pay, but that you haven’t paid yet. It’s important to track this metric so that
you can manage your cash flow. After all, if you can’t manage your debts, you could risk
defaulting. Tracking your accounts payable is a critical component to managing your cash
flow. As your business grows, you may be spending money on different services for your
business and you will receive invoices that need to get paid. Accounts receivable is the
amount of money that your customers currently owe you for things that you have already sold
to them. Essentially, it’s a total of all of the invoices that you have given to customers but that
have not been paid yet. Tracking your accounts receivable is crucial to managing your cash
flow. While your sales might be going well, if your accounts receivable continues to grow and
your customers aren’t paying you fast enough, you could find yourself in a cash crunch.
Understanding direct costs helps you keep an eye on how much it is costing your company to
deliver its product or service. If your direct costs are going up, perhaps your suppliers are
starting to charge you more, or perhaps fuel costs are going up. When your direct costs go up,
it might be time to start looking for new suppliers or to try and cut costs in your business.
Operating margin shows you how good your company is at generating income from normal
operations of the business, after you’ve spent money on marketing, sales, product
development, etc. Net profit is understandably a metric that you’ll always want to see positive,
and as high as it can be. If this number is negative, your business is probably in trouble. You’ll
need to check your cash flow to get an accurate reading on not just your profit from sales, but
the actual cash on hand your business has to stay afloat. Cash burn rate is the rate at which a
company uses up its cash reserves or cash balance. This metric is designed to show you how
fast you’re burning through your cash reserves or how you’re maintaining a healthy balance
from positive cash flow.
In the study of “Contracts, Externalities, and Incentives in Shopping Malls” by Eric D.
Gould, B. Peter Pashigan, and Canice J Prendergast, it used a unique data set of mall store
contracts to analyze the complex economic issues that arise when stores a placed together in
close proximity within a large shopping mall. While shopping malls economize on consumer
search costs by bringing a large number of stores together in a single location, they also create
a complicated web of externality and incentive issues between the store owners and the mall
developer. They have come to conclusions that first; mall contracts are written to internalize
externalities to such an extent that space is efficiently allocated in the mall. In that sense, their
study shows how the ability to contract on relevant variable (in their case, sales) can help to
counteract the inefficiencies sometimes characteristic of externalities. Second, is that they
believe that the study makes a contribution to the empirical literature on agency theory. It does
so in the context of a situation of team production, where the efforts of all relevant parties
(anchor stores, non-anchor stores, and developers) affect sales on all their parts, subject to a
budget balancing constraint.
In a study entitled, “The Relevance of Accounting Records in Small Scale Business:
The Nigerian Experience” by Raymond A. Ezejiofor, Ezenyirimba Emmanuel (Ph.D), Moses
C. Olise, they stated that although small scale enterprises may not be able to adopt elaborate
systems of accounting, a number of small scale business kept no records pertaining to their
financial operations, finance, etc while some employed professional accountants to keep
proper accounting records of their business. The accounting records keeping contribute to the
performance of small scale business hence small scale business not actually kept proper
accounting records of their activities; they could be encouraged by customized adaptive
systems.
In a campaign made by Association of Chartered Certified Accountants (ACCA),
Accountants for Small Business, aiming to raise awareness of the value of professional
accountants in SMEs. It is through people, process and professionalism; accountants are
central to great performance. According to ACCA “Governments are heavy users of
information about SMEs and become more so as their economies develop.” They managed to
make more of the healthier parts of the informal economies into the formal sector through the
use of better infrastructure and public institutions, as well as more proportionate taxation and
regulation (Schneider 2009). Obviously, governments have a great deal to gain from business
formalization, as this allows them to monitor and anticipate tax revenues as well as to improve
their control over the social impact of enterprises. It is also synonymous to the building of a
business’ finance function. Business begin to become “formal” when they start to give an
account of themselves to the state or before the law – signing contracts; acquiring licenses and
permits; demonstrating compliance with employment or other regulations; paying taxes and
social insurance contributions; tendering for government contracts.
According to ACCA’s research (ACCA 2012a) also shows that financial capabilities in
SMEs are not just a consequence of growth, but one of its causes. Even after accounting for
turnover, headcount, age and sector, SMEs with well-developed financial capabilities are
much more likely than others to be growing rapidly (at over 30% a year over three years or
more) and still retain a ‘low’ or ‘minimal’ risk rating .