Passion and Profit

Passion drives some people to start a business:

They love to make or do something so much they want to turn it into a living. But starting a small company based on a passion and managing the dollars and cents needed to make it a success are two different things.

“Small-business people we work with tell us all the time that they have no idea about anything to do with the numbers,” says Matt Fargo, a partner at Boulder, Colorado accounting firm and a mentor expert at the Boulder-based Boomtown startup accelerator.

If you want to run a successful company, though, you can’t ignore the numbers. Regardless of what kind of company it is, you have to generate enough cash to buy supplies, pay for other expenses, and if you have employees, meet payroll and associated labor costs.

That means maintaining a positive cash flow, consistently bringing in more revenue from sales than what’s going out for expenses. “Cash flow is the lifeblood of small business,” Fargo says.

In addition to cash flow, companies use other sources of information to determine how well they’re doing, including income statements, equity, debt and balance sheets. Small businesses can track how they’re doing by following key performance indicators (KPIs) such as inventory turns, or the number of times inventory is sold or used in a month, year or other time period. Other KPIs can include:

  • Revenue growth
  • Customer retention, turnover and complaints
  • Market share and growth rate
  • Cost per lead and conversion rate
  • Customer online engagement level
  • Order fulfillment cycle time
  • Revenue per employee

To keep tabs on cash flow, KPIs and other numbers, small businesses should at a minimum keep a good set of accounting records, including financial transactions and a balance sheet, and check them every month.

Company owners can accomplish the same thing by using small-business accounting software such as QuickBooks or Xero, or hiring a bookkeeper to help manage the process for them, Fargo says.

It’s not enough to delegate tracking numbers to a third party, he cautions.“The biggest mistake small businesses make is waiting until the end of the year to look at their books,” Fargo says. “You need to regularly monitor cash inputs and outputs. Smart business owners identify key performance indicators, and watch them rigorously.”