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Recent Blog Articles
How an Outsourced CFO Can Help You Establish Accounting Practices To Minimize Risk and Maximize Profit
An outsourced CFO can provide your small business with the accounting services and financial management advice you need to successfully navigate from your break-even point, so you can maximize profits and boost ROI.Read more
Leveraging the Expertise of an Accounting and Advisory Firm to Support and Optimize Your Accounting System
This fourth article in our series outlines the benefits of partnering with an external advisory firm in optimizing your business finances. We look at the comprehensive services offered by outsourced accounting specialists and how they can support your in-house teams and processes toward ideal results throughout the work year. Bookkeeping is an essential aspect of […]Read more
Lagerquist’s third part of an in-depth blog series explores how partnering with a reliable external accounting and advisory firm can help your company avoid five of the biggest pitfalls faced by businesses. External accounting specialists provide extensive real-world experience that help companies navigate the most significant financial challenges with minimal guesswork.Read more
12 Key Metrics You Need to be Tracking in Your Business Today
Posted by Sylvia Lagerquist, CPA
Business owners need to effectively manage their day-to-day operations to deliver consistent customer service, compensate and support employees, and otherwise ensure a dynamic enterprise. In addition, they need to analyze the company regularly to gain a clear picture of the company’s health at every moment.
In two previous articles, we’ve introduced three financial reports essential to every CEO, and then discussed three additional reports that every business owner should live by. Along with reviewing these key reports, business owners should also stay abreast of key metrics that they can quickly review at any point, which can rapidly paint a picture of the company’s current state.
Here are 12 key metrics you should be tracking in your business today:
Sales Bookings and Sales Revenue – This is where it all begins. Sales revenue is, simply, income from customer purchases of goods and/or services from your business. In most sectors, bookings and revenue are essentially identical. However, if your company books orders for complex products with long lead-times (such as an industrial equipment manufacturer), you’ll need to track both. That’s because you can receive a booking in January for an order that won’t be fully delivered until July, and in the meantime you’re consuming inventory, labor and other costs to produce the order.
Cash Flow – The company’s cash flow is a measurement of the balance between cash coming into the business and cash moving out of it, measured in a given period (often a month or quarter). Put simply, the equation is cash received minus cash paid out. If you pay $100 in bills in a given month but receive $200 in payments from customers, your cash flow would be $100. Your goal is to have positive cash flow most, if not all of the time. In some industries such as retail, cash flow is highly dependent upon seasons (you might purchase 80% of your inventory in the summer and fall, but wait to make 90% of your sales in the winter holiday season). In other industries like government contracting, slow payment cycles from your customers create similar challenges. Where cash flow is subject to great fluctuations, it is essential to build cash reserves and maintain strong lines of credit or other sources of interim funding to maintain the business over time.
Cash Burn Rate – Your burn rate is the speed with which your company consumes cash reserves or cash balances. Unless your company is a startup or is being funded by investors for rapid growth, your goal is to have a burn rate slower than your sales revenues. In fact, mature companies often seek to build cash reserves.
Accounts Payable – This is the total amount of bills you have yet to pay, but haven’t paid yet. This includes bills for products and services that go into your products and services (components or subcontractors); costs for operating the company itself (overhead); and the cost of maintaining payments on the company’s debts.
Accounts Receivable (A/R) – On the other side of the coin is the funds that others owe you, or accounts receivable. Remember that A/R shows as an asset on your financial statements, but that it’s money owed to you — not money in your bank account. If you can’t collect this money, you’ll have to write it off.
Direct Costs (COGS) – These are costs that are directly related to the production of your products or services for customers, such as material costs, labor costs, subcontractors, outsourced services, etc. Keep in mind that direct costs show up on your Profit & Loss Statement (P&L) and can be subtracted from revenue to calculate your gross margin.
Indirect Costs – These are the costs for your overhead and operations, such as marketing, rent, utilities, insurance, enterprise software, etc.
Operating Margin – Your operating margin (or profit margin) is the percentage of every dollar in sales that ends up left after your indirect costs are taken into account. This is important because if you compare two companies, one may be generating more revenue, but another one may be generating more profits. Profitability is an indication of efficiency and sustainability in the business.
EBITDA – This acronym stands for “Earnings Before Interest, Taxes, Depreciation and Amortization”. It is net income plus the cost of interest, taxes, depreciation and amortization. This is particularly important during business valuation or in the comparison of two companies’ financials, because it eliminates variables associated with individual accounting decisions.
Net Profit – Net profit is your operating income, with taxes and interest subtracted. In short, it’s the true bottom line of the business, when all is said and done.
Quick Ratio – The quick ratio analyzes your company’s liquidity (the availability of cash and sellable assets to meet financial obligations). The quick ratio examines the total amount of cash on hand plus the value of marketable securities plus the amount of accounts receivable (money owed to you), in comparison to the company’s current liabilities (anything that is due within the next 12 months). Your goal is to have a higher quick ratio, which shows that you have more than enough assets available to cover current liabilities.
With these 12 metrics and ratios in-hand, you’ll be in much better shape to keep a sharp eye on your business every day, week, month and year. This is also an excellent time to ask your CPA to perform a fresh financial analysis for your business to evaluate the best pathways you can pursue to achieve and sustain future growth.
- The 7 Key Metrics Every Business Owner Should Monitor
- 10 Metrics Every Growing Business Must Keep An Eye On
- What is the Quick Ratio?
- What is Quick Ratio?
- What is EBITDA?
Image Credit: Batega (Flickr @ Creative Commons)
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