Don’t risk it all while going small! Half of new start-ups go out of business within five years of starting up, including thousands of small businesses.
A major factor in business success is examining financial metrics. The more you look at your financial indicators, the better your business plans will be. However, there are quite a few metrics you need to look at.
How can you determine how much money your business is making? What figures help you track your expenses? How can you develop a strong business plan after examining your business finances?
Answer these questions and you can have a vibrant and profitable business for decades to come. Here are five important business metrics.
1. Net Income
Your net income is the money you have after you subtract all of your expenses. This is the first figure in finances you should look at, especially if your business is new. You must bring in enough revenue to cover your expenses and pay your investors, or your business will fail.
Be thorough and account for all sources of revenue and all of your expenses. Your expenses include the cost of the goods you sell, your administrative costs, and your insurance premiums.
Many of your expenses may be necessary. But try to see if there are any you can trim out. You may be able to order supplies from a cheaper supplier, or you can apply for tax deductions.
Create a net profit plan so you have a higher net income. Gather many perspectives on your company, including the perspective of a virtual CFO who can examine your company’s sales strategies. Keep your steps simple and make sure your expenses do not inflate.
Many people confuse their net income with their gross income. Your gross income is your total revenue without deducting your total expenses. Though knowing your gross income can help you see how your sales are going, you need to take out your expenses to calculate your business finances.
2. Working Capital
Your working capital is the difference between your current assets and your liabilities. Your current assets include the cash you have on hand, your short-term investments, and accounts receivable. Liabilities include your taxes, debt payments, payroll expenses, and accounts payable.
Calculate how much your current assets are. Then subtract the value of your current liabilities from your assets.
If you have a working capital with a positive figure, your business is in a good position. If you have a negative figure, you need to figure out ways to boost your assets and reduce your liabilities.
Calculating your working capital will give you a sense of your business’s finances for the near term. For long-term business plans, you need to look at other figures. But you should keep in mind how your business operations will impact your working capital, as running out of cash for one month will hurt you over the course of a year.
3. Break-Even Point
You reach your break-even point when your revenue is equal to your costs. You then start making more money than you are spending.
If you’re running a business startup, you should estimate your break-even point before you get investments. You should come up with strategies so you reach your break-even point sooner than you think.
If your business is underway, you should calculate the break-even point for the year. It may take a little longer in some years to reach the point due to fluctuations in the market.
Your point can be based on the number of units you sell or your sales dollars. For units, take your fixed costs and divide them by the sales price per unit minus variable costs per unit. For sales dollars, take your fixed costs and divide them by your contribution margin.
4. Churn Rate
Your churn rate is how often your customers stop using your products. The higher the churn rate is, the more changes you need to make to your company operations.
To calculate your churn rate, figure out how many lost customers you have. Divide that figure by your starting number of customers, then multiply the quotient by 100.
It is okay if you have a small churn rate. You may want to hire more customer service staffers and introduce customer surveys so you know how your clients feel about your company.
You should also take a look at how many products get returned to you. This can help you pinpoint if you are selling things that people don’t like or don’t need.
5. Gross Profit Margin Ratio
The cost of your goods sold (COGS) is the total cost of making your products. It includes the cost of buying supplies, running equipment, and shipping your products to your consumers.
Your gross profit margin ratio helps you calculate your revenue after you’ve deducted your COGS. It is a percentage that reveals your gross profit for every dollar of revenue you earn. A ratio of 50% means you receive 50 cents of profit for every dollar of revenue.
Take your revenue and subtract the COGS from it. Then divide this number by your revenue times 100.
A low ratio suggests you are spending too much on making your products. You need to find cheaper supplies and transportation methods. Selling more products will make your gross profit margin ratio worse, so prioritize changing your production methods before you change your sales strategy.
The Most Important Financial Metrics
Financial metrics are the key to business success. Your net income lets you see how much money you are making overall. Your working capital is how much money you have on hand after your liabilities are paid.
To see when you will start making money during a year, you should determine your break-even point. Your churn rate and gross profit margin ratio help you see how many customers and how much money you are losing.
Calculate these figures, then get help from experienced business advisors. Bennett Financials serves small businesses throughout America. Contact us today.
