Before You Set Up That Partnership, Check These Financial Metrics
When starting a partnership, or any type of business for that matter, one should be familiar with different financial metrics.
These show both the owners and investors the current state of the business. Is it profitable? How is it managing its debt levels? Can it fund its day-to-day operations? All the numbers supplied by the Financial Statement will be able to answer all these questions.
But before we go on discussing more on the matter, let us define first what is a partnership. Basically, a partnership is an agreement by two or more parties to run a business with the intention of sharing the earnings.
Upon setting up the partnership, the parties involved will be contributing capital—in a form of money, property, or anything agreed upon—and drawing up profit-sharing guidelines. Again, all these require knowledge in the financial aspect.
To have a quick assessment of your financial standing, you need to look at your balance sheet. It is a snapshot of the business’ assets, liabilities and capital. Let’s define these for easier understanding:
- Assets refer to the resources or amount of value owned by a business. It includes cash, inventories, property, equipment and investment.
- Liabilities are the financial obligation of the business. Examples are short-term loans, long-term borrowings, mortgage and income taxes.
- Capital, basically, is the funding of the business to facilitate operations.
Knowing these three basic financial metrics will also allow you to know the next steps for your business. Say you’re planning an expansion, do you have enough capital to fund it? Do you need to borrow, if ever? Is this a good addition to your assets? Check your balance sheet.
Are You Earning Money?
Ultimately, you establish a business as a means of generating revenues. To account for this carefully, you should be familiar with preparing an income statement.
Income statement, to put it simply, is a financial report summarizing all the revenues earned and expenses incurred by a business during a specific period. Deducting the expenses from revenues, you get your net income—a positive result means your operation was successful.
Apart from telling you if you’re profitable, the income statement can also help you manage your expenses well. Closely monitoring your costs can help you budget your funding even better because you can identify which items are more important than others. You can also pinpoint wasteful spending.
Income statement, most importantly, is a useful metric in laying out profit targets in the next few years.
Cash is King
As they say, cash is king—because it proves a business’ current financial ability immediately. Like any treasure, one must safeguard it—this means that it should be monitored as well.
While cash is already indicated in your balance sheet, a separate report called cash flow statement provides more detailed information. It tracks the money going in and out of the business.
The cash flow report has three categories namely operating, investing, and financing—all of which gives you an idea of how a company is spending or earning its money.
Audit firms are advising business owners to have a cash projection or forecast, allowing them to better manage their funds.
The Next Step
Now that you are familiar with these financial metrics, the next move now is to come up with the business plan for your partnership.
Your business plan will set the direction of your current and future operations. With this in mind, you must be able to come up with a detailed strategy for your business.
The key components of a business plan are budget and spending forecast, marketing and target market, competitor analysis, risk review and investment requirements, among others.
More importantly, this should include your profit targets. When are you going to break even? What is your income projection in the next five years? You should be able to answer these questions.
As an aspiring entrepreneur, one should also be flexible. This means that you should be able to accept that business plans would change through the course of time because of any event that might transpire along the way. Should it happen, you should be prepared to make adjustments.
Not Only for the Business
Understanding and presenting your financial metrics are not only important for the part of the business owners. Other stakeholders, who are a necessary part for your business to be successful, are also looking into them.
For example, your employees would want to know your financial position so they can assure their future earnings. Your financial statements can be gauged by your creditors and lenders to know if you have manageable debt levels. Even the government is checking on these metrics as part of its evaluation of the country’s economic performance.
If your business is looking for auditors, contact us for accounting services and we assure you that our team will deliver quality. 3E Accounting Philippines is also a Philippine incorporation agency helping you set up your business today.