12 FINANCIAL METRICS SMALL BUSINESS OWNERS SHOULD TRACK
Operating a small business is an exhilarating and, at times, overwhelming endeavor. There are so many details to keep track of that it’s easy to forget about the nuts and bolts of your organization’s finances – especially if you didn’t start out as a “numbers person.” Whether you’re the one who is assembling your financial reports or you’ve hired a professional (like our practice) to do it for you, it’s important for you to know which of the numbers are most important and what they mean in terms of the decisions you make and your assessment of the health of your business overall. Below you’ll find our list of 12 of the most important elements of your financial report, and what you can do with the information.
1. Profit and Loss
Every quarter, you should refresh your business’ profit and loss report to understand both your bank needs and your tax reporting needs. It is the single, at-a-glance snapshot of your bottom line that you can use to drive your own decisions and that you can show to an outsider for them to gauge your strength. If you have a reconciled balance sheet, it will ensure that everything in your P& L has been captured.
2. Average Cost of Customer Acquisition
We all want customers, and especially customers that keep spending – or that spend big. Though it’s tempting to assume a ‘whatever it takes’ attitude, you need to know the average cost of acquiring profitable customers, and then assess whether you can cut those costs in order to make them even more profitable. Knowing the average cost of customer acquisition can also help you figure out what to spend on customer retention and the value of upselling.
3. Budget Versus Actual
Think you’re sticking to the plan based on what you see in terms of your bank account? The truth is that if you compare what you’ve budgeted as compared to what you’ve actually spent it will give you a far better sense of whether you’re staying on track and what kind of adjustments you need to make.
4. Cash Flow
Most people consider cash flow the most telling metric of all, and cash certainly is the lifeblood of any company. If you’re not keeping your eye on your cash flow you could find yourself caught unaware and flatfooted when it comes to making essential payments, so make measuring your cash flow (as well as your cash burn – the amount you go through monthly) and your runway (how much you can operate based on your cash on hand) part of your regular business health check.
5. Fixed Burn Rate
No matter how well you are doing, there is always the chance that you’re going to encounter some unforeseen circumstance or drop in business that is going to drive the need to cut costs. The best way to do that is to take a close look at your fixed burn rate and make sure that it isn’t too high. As tempting as it may be to sign on to a long-term contract to save a little money, if you commit yourself to a payment that you can’t afford at all in the future you may be sorry. You may be better off taking some of those expenses off of a contracted status so that you can eliminate them if you have to.
6. Employee Productivity
Though it’s a given that your employees are your most valuable asset, that doesn’t mean that you should be operating without ensuring that you are getting enough value out of them to justify what you are spending. The best way to do that is to actually monitor each employee’s productivity to make sure that everybody is more than pulling their weight.
7. Operating Cash Cycle
When a business wants to expand, they can’t move forward blindly. They need to have a good handle on how long it takes for cash to become available to them after their capital investment so that they can feel confident in their ability to go through with their plans. Those who fail to understand their operating cash cycle risk joining the ranks of the 82% of businesses that fail due to poor cash flow management (according to U.S. Bank).
8. Churn Rate
When you think about how hard you work to acquire new customers, it’s no wonder that knowing how long you’re holding on to them is a key metric. If you’re churning through your customers too quickly it means that your product or service isn’t valuable enough to them to stick around for more. Understanding how fast they’re leaving and the reason for it is the first step in stopping the bleeding and making your business more profitable for the long term.
9. Regulatory Requirements for Your Industry
It’s easy to forget about renewing your industry license or maintaining a minimum capital in keeping with regulatory requirements, but you can’t let yourself do it. Failing to keep track leads to unnecessarily having to pay noncompliance penalties. Make sure that you include these elements within your financial report and calendar.
10. Projected Profit Loss Versus Actual
A big part of your annual financial plan should include a projection of what you believe your profit and loss will be, as well as a budget for each of your expense areas. Having this will allow you to compare what you projected to what your actual profit and loss is, and to then review where things went askew. Some may be explainable and worthwhile, and others may be warnings of things getting out of control.
11. Profit Goals and Profit Per Customer
One of the most effective ways to promote profitability is to take a granular, analytical approach to your profit goals. By determining what your short-term and long-term profit goals are, you can then break it down to what your profit goal is per customer based on either your existing customers or the number of new customers you need to acquire. All of these numbers can drive internal processes and help you get where you want to go.
12. Financial Ratios
Ratios are among the most useful metrics that a small business owner can use to determine the overall financial health of their organization. Among the most important are their liquidity ratio (how much cash you have on hand to pay the monies you owe); your efficiency ratio (how much it is costing you to bring in a single dollar); and your profitability ratio (profit as it compares to revenue).
Each of these elements is extremely beneficial in helping you understand where your money is at any time. If you’d like to discuss how our services can help you run a successful business, please contact us for more information.