Key small business metrics: Part one
Learn how to read the pulse of your small business's financial metrics to make sure you're in good shape.
Financial metrics are crucial for running a successful business. When you take the time to analyze these metrics, you can track progress, as well as work to diagnose and address problems that may hinder the business.
Seeing the growth your business is making can be highly energizing and provide positive reinforcement. When you and your team see what's working well, you'll feel motivated to achieve more. You can also see where to focus your efforts in order to become even more effective.
Here are some tips along with a breakdown of the types of business metrics you should be keeping tabs on.
At a bare minimum, track your financial metrics on a monthly basis. Tracking certain key indicators weekly is advisable, because the act of reviewing them serves as a regular guide for your team's priorities. This way you won’t be tempted to let a priority slide until another month rolls around. Also, be sure to track progress over time by comparing the current month with previous ones.
In addition, your business may have key indicators that are industry specific. For example, some businesses look at a revenue-per-employee metric to keep high-level tabs on revenue growth versus staffing levels. However, there are some metrics common to all businesses.
Break your sales performance down into weekly targets that can help you reach your quarterly or annual revenue goals. Then compare your progress toward year-to-date goals, and compare the current period with previous months or years. This way you can track the effects of seasonality, for instance, or the impact of marketing campaigns on sales.
For product or retail companies that carry inventory, measure inventory turnover. This is your total sales divided by your total inventory. This determines the rate at which merchandise is moving and can help you determine the effect on your business cash flow.
Failing to promptly collect payments can negatively impact your cash flow. This can be a detriment even to businesses with strong sales, such as in industries where long payment cycles are common like the staffing industry, or where you have a lot of up-front selling and manufacturing costs.
Calculate the average number of days it takes to collect receivables. Calculate your collection period by dividing your accounts receivable by sales, and multiplying that by 365 for the number of days in a year. Then see where you can improve if the number seems to get out of line.
Profits and costs
Start by measuring your return on sales, or profit margin, to determine your year-to-year profit. This is the net profit, after taxes, divided by sales. This shows what you earn for every dollar of sales and indicates your business's efficiency.
Another measurement is return on assets, or net profit, after taxes, divided by total assets. This is a key profit indicator. It compares operating profits with the assets available to earn a return.
An essential element of profits is costs, of course, but it's important to measure costs separately from profits. For this, it's helpful to review your profit and loss statement, including costs by line item, at least monthly.
There are two key metrics that will help measure liquidity in your business:
Quick ratio: This shows the dollar amount of liquid assets available to cover each dollar of current liabilities. To calculate this, add your cash and accounts receivable, and then divide by total current liabilities.
Current ratio: This measures your ability to cover any possible reduction of current assets. This is total current assets divided by total current liabilities.
These are just some of the key financial indicators for measuring the overall health and progress of your business. In part two, we’ll focus on non-financial metrics to track, along with tips for putting them to use.