6 Important Numbers Every Business Owner Should Know
The most important thing any business owner can do is to familiarise themselves with six basic metrics of success. Commit them to memory and seek to understand how your business succeeds or falters based on where these numbers lie.
Why do these metrics matter?
Many business owners rely on a number like Profit & Loss to tell the story of their business. The problem with doing this is that it’s a bit like driving a car using only the rear view mirror.
Relying only on the simple metrics doesn’t help you forecast the future, thus reducing your ability to adapt and adjust to positive and negative circumstances.
What you need is the ability to not only adapt, but to see the future and know how to bend it to your will. Learning to measure and monitor these six metrics will help you do just that.
- Days Receivable
How long is it taking you to get paid? Compare this to your contract terms and work out how much more cash you would have in the bank if customers paid on time. For example, how much would change if you got paid five days earlier? If not getting paid on time or your current pay windows are causing a problem, have a good hard look at your ‘Rules’ (Trading Terms) and your ‘Processes’ and look for ways to improve them so that you can keep more money in the bank.
- Net Profit Margin
Your profit margin must be positive and growing when you compare it to a prior period! Even in theses tough economic times, most businesses’ top lines are falling – but it’s the bottom line that matters. Dynamic businesses are able to make a shift in their operations to ensure the net profit margin remains positive, and is slowly increasing over time.
- Working Capital Ratio
This is also known as the ‘current ratio,’ because it compares current assets to current liabilities. Though most businesses are different, we encourage our clients to strive for a ratio of 2:1, even in tough times. Any more and you’re probably being too conservative with your capital. Any less and you risk being unable to recover should something unexpected happen. However, every business has an optimum ratio, you need to discover yours.
- Breakeven Sales
This figure is absolutely key to your survival, especially because it changes with every change you make to your overheads or gross profit margin. You should know this metric on a monthly, weekly, even daily basis to be able to set relevant targets for yourself and your employees. If you are selling a product, know how many units it takes to break even. If you are selling a service, know how to get to zero, regardless of whether you measure it whether in units, jobs or hours. It is vital to the success of your business that you know these numbers.
- Gross Margin
I believe for most businesses this is the most important number to monitor. Your gross margin must remain consistent over time. A gradual decrease over time is usually because one of two factors: 1) inflation is boosting your costs, but you haven’t changed the price to your customers, or, 2) productivity levels have dropped. This may be due to utilisation if you are a service provider, or quality and quantity of product if you are a manufacturer. Either way, it is vital to your business that your gross margin remains at least constant over time, and better still increasing.
- Cash at the Bank
In all cycles of the economy, cash is king. It is cash that pays your suppliers, pays your employees, and most importantly pays your dividends! Trade debtors, loans and equipment don’t have the ability to pay you a return on your investment like cash does. Keeping a close watch on your cash balance is like checking the finished product of a well managed assembly-line. Focus on improving your cash flow as this will fund all of your Business and Investment Plans.