Measure only what you monitor, and monitor what you measure. The bottom line is that if you don’t manage your business, it will manage you. If you’re aiming at nothing, you will hit it with huge accuracy! One of the main reasons so many small businesses fail, is the owners simply don’t know how or what to measure, or even when. Using metrics will help increase your business’ profitability.
Gross margin is an important metric to understanding profitability. Gross margin helps identify variances in production costs or inefficiencies in managing labor costs. Reviewing this metric over several intervals will identify where inefficiencies occur or where costs can be lowered and/or re-negotiated with suppliers. The gross margin is also impacted by sales price and validates when changes are necessary.
Another important measure is net profit margin, which illustrates the portion of profit generated from each sale. This is likely the most vital data point in understanding profitability. This metric reveals efficiencies, economies of scale, as well whether or not your overhead expenses are in line with your performance.
Most business owners are very aware of their current cash balance; however, they typically do not understand the dynamics of their cash flow. Part of your statement of cash flow, the cash flow from operations line, describes the cash being generated by the business operations, over a defined period of time. While a company may show a positive trend with net profit margin, a negative trend in accounts receivables or lack of management of accounts payable, can easily alter the cash flow of a company. So many times, an owner says “My income statement shows that I am making money but I don’t understand why the cash isn’t there”. Since cash flow problems are most typically the culprit of failing companies, you can see why this metric made the list of those most important to track.
How can Thrive help?
Thrive provides a way to help track your business’ profitability utilizing metrics like these so that you can focus on your team and continued successes.