For your business to thrive, you have to know what’s going on. Unfortunately, it’s not as simple – usually – as counting your deposits and subtracting costs. There are many financial factors and variables that dance constantly on a day by day basis. It is very important that you as an owner know the health of your business at any given moment.
This isn’t as easy as it may seem. There are complex forces at play and you need complex formulas to give you a clear picture of your finances. Gene Marks, in an article in Forbes, has thoughtfully provided you with nine metrics that show how your business is doing.
In his article, he states that these metrics are in no particular order, but he begins – as do we – with a hard look at cash flow. “Cash is King” as the saying goes, and no matter how large your account receivables are, if you have zero or negative cash flow, your business is dead before it can collect. Marks’ two metrics for cash flow are the standard accounting metric, and one that provides a clear picture of how things are flowing.
Leading from cash flow to its headwaters is a comparison of receivables-growth versus sales-growth. Not to ruin the ending for you, but if they aren’t tracking at the same rate, you might be in trouble. Next to be covered is your interest rate. It’s important to be very acquainted with this part of your balance sheet as it reveals if you are generating enough income to cover your loan interest and pay down your debt.
The other metrics include inventory turnover, backlog tracking, and on-time deliveries. These particular metrics may not seem as important as the ones above, but remember, you need a good overall look into your company. These metrics let you know if you are carrying too much inventory, are producing too much product, and if you deliver on time. This last one is not so much a financial tool, but a customer service one. It is however, no less important. If you are consistently late, you’re customers will notice and they might just notice that your competition isn’t usually late as well.
Using metrics, spreadsheets, or whatever you like to monitor your company is not an exercise in futility. Yes, when speaking of your company’s financial position, “it is what it is,” is approximately true. However, looking at it anyway can help you spot growing problems, or hidden opportunities… things you definitely do not want to overlook.
