5 Financial Metrics Every Business Owner MUST Know and Pay Attention to (and Why)

It’s Halloween, so I wanted to pick what is a SCARY topic for many business owners: FINANCIALS.

Apparently, for most business owners (even solopreneurs), this is such a scary topic that they choose to ignore it.  The thinking goes that, as long as there is money in the bank after bills are paid, the business is doing well.  Leave it to the accountants.

Unfortunately, this is like saying that as long as you can still walk, you are “healthy.”  In reality, there may be growing problems that, unless you know how to look for them, will catch you by surprise.  After all, how many times have you heard someone mention a business closing and say, “I thought they were doing OK”?

Just like you need to pay attention to your blood pressure, cholesterol, glucose, and many other levels; it is essential that you as a business owner keep track of these:

1.  Revenue:  Current vs prior year, vs last 12 month average, vs. last 3 month average.    Revenue is, obviously, a measure of your businesses’ ability to get people to PAY for what you deliver.  That said, it is essential to understand what revenue is doing.

– Versus Prior Year:  How are you doing right now, versus the same time last year?  This is just a basic measure

– Versus Prior 3 Months:  This is particularly important in fast growing businesses.  So, if your average sales from June – August were $40,000, and September is $50,000; then you have the appearance of rapid growth.  That said, do the same analysis on last year (prior year September versus prior year June – August) to understand if the growth is just a seasonal “bump”

– Versus prior 12 months:  This helps you understand your current results versus what the average sales were over the last year.  Think of the prior 12 months as a “water level” for your business.  Is the current month’s revenue above, at, or below that “water level”

Once you know these numbers, do the analysis.   What was the reason for the change this month vs. the comparison periods?  Any new Marketing initiatives?  Different team members?  New products?  Product mix changes?  New Team members or lost team members?  New customer service initiatives?

2.  Transactions:  Do all of the same analysis that you did on Revenue.  If you are building your business well, then you should see steady increases in transaction counts.  Even more telling is if you can define whether your “mix” of transactions is coming from new customers, repeat customers on a regular buying cycle, or maybe repeat customers attracted because of a new marketing campaign or improvements in service.

3. Revenue per Customer:  What is each customer giving you for each purchase?  If this changes, is it because your prices went up; or are people buying different products?  Perhaps you trained your team on “trade-up” strategies, and they worked.

4.  Margins:  You must know your Margins, both:

Gross Margin:  For ever dollar you sell, there is a DIRECT cost of the product.  For example, a restaurant sells a meal for $10, but its cost of food, paper goods, garnishes, etc is $30; while it’s cost of labor directly attributable to the sale, both the cook and servers, is 20%: so, your Gross margin is 50% (100% less 30% less 20%)

Net margin:  Besides the costs directly attributable to the individual sale, you have your fixed costs like rent, management salaries, utilities, repairs and maintenance, training, office supplies, etc..etc…  Net Margin is what is left over after ALL costs have been subtracted from revenue.

WATCH CAREFULLLY the movement of Gross Margin and Net Margin, both  on an individual basis as well as compared to each other.  This analysis is a great way to “catch” waste and potential issues in your expenses that often are never looked at until they become huge problems

5.  Net Working Capital.  The “official” definition is current assets minus current liabilities.  What I tell my clients is to pay attention to this number as “how much money could I spend RIGHT NOW, if all of the bills due in 30 days had to be paid RIGHT NOW.”  I know it’s not the formal definition that the Accounting Board would approve; but it lets you have a real sense of what you have.

IF this number is negative, you had better know exactly why this is the case and have a specific path to make it positive soon (not “hope,” but a specific plan).  For example, you may invest in a new marketing campaign today that makes your Net Working Capital fall into the negative; but the expected return from the campaign will make your business a profit to make Net Working Capital positive in 60 days.

The fact is, TRULY successful businesspeople “know their numbers” because those are indicators of the health of the business.  Thinking that these are just “for the accountants” is a sure way for you to make poor decisions about the future of your business.

I’m going to be blunt and loud:  STOP WORKING SO DOGGONE HARD IN YOUR BUSINESS AND START UNDERSTANDING WHAT’S HAPPENING TO IT.  Understand and analyze your numbers, or you WILL struggle more than you have to.  If your sales are up, know why.  Maybe there is something you should be doing more of.  If sales are down, don’t throw “the economy” excuse at it; know why.  Is it seasonal?  Did your product mix change?  Is your team not providing great service.  etc., etc, etc.  Knowing your numbers will catch a brushfire before it burns down the forest.

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If you do not really understand how to do this, then make an investment in your future and invest in a coach who gets it (not just a “marketing coach”).   Get out of the “scarcity” mindset (I do not have the money to invest now..maybe later), and into an “abundance” and belief mindset (I have potential that can be maximized and I believe in myself and my business enough to start maximizing it now).  Every day you spend in scarcity just guarantees more scarcity.

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