June 24, 2020
The Key Metrics Every Business Owner Should Monitor
If you run your own business today, what did you visualize when you first started it? When I started mine, I saw happy clients, I saw myself doing work that I loved, and I envisioned earning enough to create the lifestyle I wanted. The last thing I was thinking about was my key “business metrics” part – measuring, comparing, analyzing, and figuring out how my business was really doing.
I learned fast, however, that I had to pay close attention to the numbers if I wanted to succeed. Initially, it wasn’t my favorite thing to do, but I’ll let you in on a secret: When you work hard at your business and your income starts to reflect that, it’s actually fun to see how the numbers stack up.
You have to know what metrics to pay attention to, though. No matter what product or service you provide, you risk failure if you don’t stay on top of these basic measuring sticks that reflect the ongoing health of your business.
The business metrics you track will differ according to your business type (for example, online product sales, a subscription-based business, a professional service, or a brick-and-mortar retail operation), but there are certain numbers that every entrepreneur must watch.
Here’s a rundown of the key business metrics:
Metric 1: Cash Flow
Cash flow is king. It’s a measurement of the money that is coming into and flowing out of your business bank account over a period of time. Money that you pay out to sustain your business is referred to as negative cash flow. Money that comes in through product or service sales is positive cash flow. The formula is simple: Cash received minus cash paid out equals your business cash flow.
It’s perfectly normal for this number to fluctuate, depending on the seasonality of your business and where you are in your business journey. For example, if you’re just getting your enterprise off the ground, you’ll likely have negative cash flow for a while before sales start to tick up.
The important thing is to be aware of whether the number in your business bank account is growing or dropping over time.
Eventually, you want to be in a position where you can create a realistic forecast for cash flow. That way, you know how much you need to have on hand to pay bills or when it’s the best time to buy new equipment or inventory to grow your business.
Now you’re working as a proactive business owner instead of a reactive one!
Metric 2: Accounts Payable
Also known as “AP,” accounts payable reflects the total dollar amount of bills you have to pay monthly to sustain your business. You also should break this metric down into the categories of fixed expenses (software fees, rent or lease payments, utilities, etc.) and variable expenses (postage, advertising and marketing, payroll, taxes, etc.) to have the complete picture in front of you. Of course, when you pay attention to and measure these numbers over time, you can better plan and manage your cash flow.
Metric 3: Accounts Receivable
It follows that accounts receivable (or “AR”) is the total amount of money that you are owed from clients or customers but haven’t received yet. For obvious reasons, staying on top of accounts receivable will let you know who pays you on time and who needs to receive a late-payment notice from you. Again, this is a business metric that allows you to more accurately monitor cash flow.
Metric 4: Direct and Indirect Costs
These two cost categories can be confusing if you’re just getting started with your business budget, but you’ll save yourself time and money if you learn to distinguish the differences. In simple terms, direct costs are those specifically associated with the cost of producing the products or services you sell, such as materials and labor. Indirect costs (also referred to as overhead expenses) include items such as rent, utilities, marketing and advertising, payroll, and taxes.
Correctly categorizing and measuring these costs is important for two reasons: first, it helps you run your business more profitably and efficiently, and second, you can deduct indirect costs (overhead expenses) on your business tax return.
Metric 5: Profit or Operating Margin
Your profit or operating margin reveals the percentage of profit you make on every dollar of sales. Percentage is the key word here. For example, if a store sells $100,000 worth of product each year and the total expenses to run the store is $90,000, the remainder is $10,000 or a profit margin (also referred to as net income) of 10%.
Why is this business metric important? Even if you see that your revenue is increasing, your profit may not be. Controlling costs and finding ways to sell more efficiently will increase your percentage of profit. To measure how you’re doing, compare your current quarterly or yearly numbers with those in the previous year or quarter.
Of course, you’re ahead of the game here if you’ve been tracking this metric all along and have some history for comparison!
Metric 6: Net Profit
It can be easy to confuse profit with net profit. Net profit is one of your best measurements for business success because it reflects the bottom line in dollars of your business – what you get when you subtract all of your expenses from all of your revenue. In the above example in simplified terms, the store has a net profit of $10,000.
Of course, it’s preferable to generate consistent net profit every month in your business. To achieve that, you may have to price your product or service more competitively, drop products or services that are unprofitable, more effectively manage inventory, look for ways to reduce costs, or all of the above. The point is – when you measure, you have the information you need to make the right decisions.
Metric 7: Cash Burn Rate
This business metric reveals whether you’re maintaining a good cash flow balance. It’s a simple formula: your cash balance in the previous month or quarter minus your cash balance in the current month or quarter equals your cash burn rate.
The goal is to consistently maintain a balance that’s sustainable for your business, taking into consideration the variables of your costs, revenue, profit, and any seasonal fluctuations.
If you burn through your cash reserves faster than you realize, you may be in trouble!
When I was a new business owner, it took some time to get acquainted with the above terms and to understand how I could use this information to grow my business in a financially responsible and profitable way. Once I did, I felt excited, empowered, and confident about my future success.
To get serious about growing your business, you need to understand the financials behind it. The business metrics above are an excellent starting point. When you consistently track these numbers, you gain visibility into what is really going on in your business.
The more data you gather, the more you appreciate the value of that data.
The hard part is starting. But, the sooner you begin, the sooner you’ll start to see results that can help you steer your business toward profitability and success!
Do you have questions about how you can succeed in your business and accelerate your journey toward reaching your goals? I invite you to learn more about From Startup to Success coaching packages. Begin with a no-cost 30-minute consultation to discuss where you are with your business and where you want to go.
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