Small businesses owners and managers need to have a strong understanding of their financial performance in order to make operational decisions to move their business forward to achieve their goals. While some small businesses struggle to even maintain an accounting system and record of their expenses and revenue, the most successful small businesses are making key strategic decisions off of their financial data to catapult their business ahead of their competitors.
Our professionals here at Cloonan & Associated, PC CPA Services came up with a set of 10 key financial metrics for small business owners to track to make vital decisions for their businesses:
1. Profit And Loss
This is probably the most basic metric on our list, but small businesses need to track their accounting profit and loss to be able to present to key outside entities such as banks and investors. Also, the items on the profit and loss (income) statement are needed for accurate tax compliance and tax planning.
2. Cash Flow - Runway
There are dozens of important cash flow metrics that businesses need to understand. One key metric is runway, which calculates the amount of time a business can remain solvent (the ability to pay vendors and debtors) without the need of raising additional funds. Simply put, tracking this metric is tracking how long your business can stay in business without a key change. Many small businesses have shorter runways than they realize.
3. Profit Per Customer or Segment
It is important for a small business to know how much money they are making on each customer and each segment/division of their business. Often, small businesses are focusing their operation on a certain segment wherein the reality is they are making the most money in a smaller segment that could be increased.
4. Average Cost Of Customer Acquisition
Making $1,000 off of a customer doesn't make much sense if it cost $1,100 to acquire them through advertising costs and salesperson labor. Most businesses do not know how much it is costing to acquire each new customer. By understanding these details, businesses can allocate their marketing efforts in a more effective way.
5. Burn Rate
A company's burn rate is simply the rate in which they are depleting their cash reserves. Obviously assuming a situation common to many start-ups where the company is not yet generating a positive cash flow, understanding the burn rate highlights the exact amount of time a company can exist on their cash reserves at their current expense levels.
6. Churn Rate
The churn rate measures what portion of a company's customers stop doing business with the company over a measure timed period. This metric can give insight into a company's success or failure in customer service or their marketing efforts to existing customers.
7. Budget Versus Actual
Every business should have a budget for their expenses and cash outlays. Sometimes these budgets are annual but they can often be monthly and even weekly. Regardless of the time period, a key financial metric is to measure the actual expenses or cash outlays versus their budgeted counterparts. This allows a business to see where they may have overspent or to update their future budgets.
8. Employee Productivity
Businesses should take a deep dive in understanding how efficiently is their labor expenses producing revenue or limiting costs to the business. There a variety of individual metrics that can be catered to the specific business for this understanding, but the key principles are meant to discover the return on investment businesses are receiving for their labor costs.
9. Accounts Receivable Turnover Ratio
The revenue cycles of many small businesses rely on a system of billing invoices and receiving payment on those invoices. The turnover ratio is a common metric that provides helpful insights into a company’s liquidity and cash flow while also indicating how effective the company is at collecting revenue.
10. Interest Coverage Ratio
The interest coverage ratio is a debt and profitability ratio used to determine how easily a business can pay interest on its outstanding debt obligations. It is useful for businesses to understand this metric in order to assess how likely they are to default on their debt obligations in the future. Also, businesses should track this ratio because any future lenders or investors are going to look hard at this ratio.
Our professionals here at Cloonan & Associates, PC CPA Services are well experienced in helping businesses make key financial decisions through key performance indicator solutions. One common way we help businesses is to create real-time financial metric dashboards that show in real time the key metrics business owners and managers need to make their important strategic decisions. This image is an example of what such a customizable dashboard might look like for a business:
Please contact us to discuss how we can help your business get the most out of your financial information to make decisions to catapult your business towards your operational and financial goals.