Is your business healthy? How do you know? The most effective way to find out is with a set of business metrics that work.
Using metrics should be part of any business plan. Why? As a business owner, you have goals. Naturally, you need to know if what you’re doing is helping you achieve those goals. The only way to get this information is to measure success along the way. Metrics can help keep you on track. By measuring different aspects of your business’ performance against a standard baseline, you can determine how well you’re really doing, and more importantly, where you need to improve.
Here are five of the most valuable business metrics you need to be using:
Revenue Growth
What is your business' share of the market? How about your industry’s pricing strategy? You can come up with a good metric for growth by figuring out where your company stands in its niche, according to industry standards. This involves calculating:
- industry growth
- your market share
- your pricing on products and services
Analyzing revenue growth is not an exact science, and it involves some assumptions; however, it is a reliable metric for predicting future growth.
Company Expenditures
General company expenses should be monitored constantly. An increase in expenditures could represent growth, but it's important to remember that not all increases in spending are equal. If your expenses (for instance, salaries, marketing efforts, or technology) are not in line with their value to the company, or if they aren’t generating sufficient ROI to justify their cost, then they need to be reevaluated.
To better gauge the value of your expenditures, ask yourself these questions about your Sales, General and Administrative (SG&A) costs:
- How are SG&A expenses distributed throughout the company?
- What is the ROI for expenses in each department?
- Is the growth of these expenses in line with growth in revenue?
Corporate expenditures are an important metric when you assess your company’s financial well-being. Make sure your expenses correspond to their value to ensure that you’re running a lean and healthy operation.
Cash Flow
Adequate cash flow enables your business to invest in its future, making liquidity an important metric for assessing your financial solvency. If you are running low on funds, for example, you need the ability to rapidly generate a plan to shore up your reserves.
It’s all about trends. Look for the following information:
- cash inflow
- cash outflow
- cash inflow and outflow streams over time
Net cash flow metrics are critical when it comes to reaching your financial goals. Monitor this data constantly in order to resolve issues that limit your growth, such as long payment cycles or overspending on SG&A expenses.
Structural Efficiency
How efficiently is your business structured? Is it competitive with others in your industry? Evaluating your structural efficiency involves calculating gross margins -- the higher your margins, the better. Reviewing your gross margins regularly makes it easier to tell if your business is heading in the right direction at a sustainable pace.
Three points to consider when evaluating structural efficiency are:
- Your pricing policy for goods and services
- Inventory management
- Market conditions
Periodic review of these factors is critical to maintaining financial health. Price fluctuations due to changing market conditions should be monitored closely. Excessive inventories and an insufficiently competitive pricing strategy can and will hurt your bottom line.
Profitability
Quite simply, profitability speaks to the ability of your business to grow. The metric you need to evaluate your company's profitability is your operating margin. Your percentage of operating margin is calculated by taking the company’s operating income (found by subtracting the cost of goods sold [COGS] and SG&A from your revenue) and dividing this number by your total revenue.
A low operating margin requires a different strategy than a high one. It’s important to know where you stand so that you can adjust to meet your long- and short-term financial goals.
