Revenue gets a lot of attention in business. I see and hear about it all the time.
It’s easy to understand why. It’s visible, easy to compare and often the first number business owners use to measure whether things are moving in the right direction.
But revenue alone doesn’t tell you whether your business is actually getting stronger.
A business can be growing its revenue while margins are shrinking, cash is getting tighter and tax liabilities are quietly accumulating in the background.
High-performing business owners tend to look beyond the top line. They monitor a small group of financial indicators each month that help them understand not just what happened, but what may be coming next.
Here are five worth watching.
1 – Cash Flow: Where Is the Money Actually Going?
Profit and cash are not the same thing.
A profitable business can still experience serious cash flow pressure if customers are slow to pay, stock levels are increasing, debt repayments are high or significant amounts of cash are being withdrawn from the business.
That’s why your monthly financial review should go further than simply checking the bank balance.
Consider:
- How much cash came into the business?
- How much went out?
- What significant payments are coming up?
- Are debtors taking longer to pay?
- Are there seasonal cash flow pressures ahead?
- How much cash does the business need to comfortably operate?
The objective isn’t simply to know how much cash you have today. It’s to understand what your cash position is likely to look like in three, six or even twelve months.
That visibility gives you time to make decisions rather than react to problems.
2 – Gross Margin: Are You Making Enough From What You Sell?
Revenue growth can look impressive until you examine what it costs to generate that revenue.
Gross margin helps show whether the core economics of your business are improving or deteriorating.
For example, revenue may increase by 15%, but if supplier costs, labour or delivery expenses have risen faster, the additional sales may not be translating into additional profit.
Rather than looking at gross margin once a year, monitor it regularly and investigate material changes.
Ask:
Are our prices keeping pace with costs?
Has our mix of products, services or clients changed?
Are particular areas of the business more profitable than others?
Are we winning more work but making less from it?
For many businesses, a relatively small deterioration in gross margin can have a significant impact on annual profitability.
Knowing early gives you an opportunity to respond.
3 – Owner Drawings: How Much Cash Is Leaving the Business?
This is one of the numbers that can easily be overlooked.
Successful businesses often fund more than their operating expenses. They may also support the owner’s personal lifestyle, investments, loan repayments and other financial commitments.
There is nothing inherently wrong with extracting wealth from a successful business. In fact, building wealth outside the business can be an important part of a broader financial strategy.
The issue is whether those withdrawals are being planned and understood.
Business owners should know:
- How much they are drawing from the business
- Whether drawings are sustainable
- How those amounts are being treated for tax purposes
- Whether enough capital is being retained for future business needs
- Whether there is a more effective way to extract and deploy profits
This becomes particularly important as a business matures.
The question gradually shifts from “How much profit is the business making?” to “What is this business ultimately creating for me and my family?”
4 – Working Capital: Is Growth Putting Pressure on the Business?
Growth consumes cash.
That can surprise business owners, particularly when sales and profits appear strong.
A growing business may need to fund additional employees, inventory, equipment or suppliers well before it receives payment from customers.
Working capital helps you understand the relationship between the money tied up in day-to-day operations and the short-term obligations the business needs to meet.
Keep a close eye on:
- Accounts receivable
- Accounts payable
- Inventory or work in progress
- Debtor days
- Creditor days
- Short-term cash requirements
If receivables are increasing faster than revenue, for example, the business may technically be growing while becoming increasingly cash constrained. Understanding your working capital cycle helps you determine how much cash the business actually needs to support its operations and future growth.
5 – Tax Provisions: Is the Tax Money Actually There?
A strong trading month can create a false sense of available cash. Some of that money may already effectively belong to the ATO.
GST, PAYG withholding, income tax, superannuation and other obligations can accumulate quickly, particularly in a growing business.
Rather than waiting for a BAS or tax bill to determine what is owed, business owners should have visibility over their expected tax position throughout the year.
A regular tax provision allows you to understand:
What have we earned?
What tax is likely to arise from it?
What cash should be set aside?
What significant tax payments are approaching?
Tax planning is much more effective when it happens before the liability becomes due.
And importantly, money sitting in the bank is not necessarily money available to spend.
The Numbers Are Only the Starting Point. Monitoring these figures is useful. Understanding what to do with them is where the real value lies.
A monthly financial review should help you answer bigger questions such as:
Are we becoming more profitable or simply getting bigger?
Do we have enough cash to fund our growth plans?
Should we be retaining profits or extracting more wealth from the business?
Are we carrying enough working capital?
What does our cash position look like six months from now?
Are there tax decisions we should be making before year-end?
This is where a Virtual CFO or strategic business adviser can add another layer of value.
Rather than looking backwards at financial statements after the year has finished, CFO-level thinking uses current financial information to help guide the decisions ahead.
From Reporting the Numbers to Using Them. Good accounting tells you what happened. Advisory helps you decide what happens next.
For established business owners, monthly financial reporting shouldn’t simply be a compliance exercise. It should provide a clear picture of the health of the business and support better decisions around growth, cash flow, tax, investment and personal wealth creation.
You don’t necessarily need dozens of KPIs or complicated dashboards. You need the right numbers, reviewed consistently and understood in context.
At New Leaf Advisory, we work with business owners to look beyond annual compliance and understand what their financial information is telling them throughout the year.
If your business is performing well but you want greater visibility over cash flow, profitability, tax and the decisions ahead, a more strategic approach to your numbers may be the next step.
Is your business giving you the financial visibility you need to make the next decision confidently? Let’s talk.