Entrepreneurs have no problem developing and analyzing their product or service – the good ones even know their target market and list of critical customers. Many, however, don’t know the fundamental metrics necessary to determine whether or not a business is healthy. Some don’t even track their bottom line until the end of the year. If this sounds like your business then here are 5 fundamental health metrics you should be tracking on a daily basis.
1) Sales Revenue
This might seem like the most obvious metric but many businesses don’t perform enough analysis when it comes to sales figures. Just tracking the top line number isn’t enough, especially for businesses that have several products or services. By tracking sales figures to non-financial metrics many business owners can fundamentally transform their business.
For example, if a business sells multiple products then it should track sales by product. This metric will determine what is and what is not selling. Management decisions to stop listing a product or invest more heavily in a particular product could mean the difference between boosting sales or shrinking bottom lines.
2) Cost of Goods Sold
If an entrepreneur doesn’t know the cost of their product or service then they won’t know if they are making or losing money. Keeping track of the per unit cost of a product is difficult but it is fundamental for any business owner. If you ever watched an episode of Shark Tank then you’ll know that one of the first questions any smart investor ask is, “how much does it cost to make?”
Keeping track of both sales per unit and cost of per unit gives you your profit margin per unit. If you are not making a profit per unit then it might be time to either increase the sales price or decrease the direct cost.
Overhead is often the make or break for most businesses. Most products can be made and sold at a profit but if there are not enough sales to cover your overhead then that means the doors close. Keeping track of overhead cost by category is important to track monthly, quarterly or annual variations in expenses.
Overhead cost can be mitigated by simple management decisions. If borrowing cost are high then maybe it’s time to refinance. If rent cost are consistently increasing then maybe it’s time to renegotiate the lease or move. If you do not know your overhead cost, specifically those that are rising exponentially, then you can’t make the vital managerial decisions that can save your company money.
4) Operating Cash Flow
Operating cash flow is a measure of the amount of cash a business is generating during normal operating cycles. Negative operating cash flow means more cash is flowing out of the business through operating expenses then are coming in through customer sales.
Through proper cash flow management techniques, previously discussed here, business owners can slow the cash outflows and accelerate cash inflows. This is vital for businesses with liquidity issues and trouble paying reoccurring bills.
5) The Bottom Line
Tracking the bottom line is one of the most important metrics of a healthy business but it is often times overlooked by entrepreneurs. CPA’s see this problem all the time; they will sit down to do tax planning with their client and discover a healthy bottom line. Although this is great, the client will be surprised with the large tax liability. At this time the client will say, “there is no way I made that much money.”
This problem is two fold, incomplete books and records and misclassification of business expenses. Nondeductible expenses, misclassification of fixed assets, under-reporting of revenue are just a few reasons why business owners are left in the dark when it comes to their bottom line.
By keeping track of important financial metrics, entrepreneurs can greatly improve the health of their business. Proper maintenance of books and records, tracking financial and non-financial data and regular meetings with your CPA can mean the difference between boom or bust.
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