Financial Matters - Adam Lean
|Adam Lean has served as an accountant, small business owner, writer and consultant. Adam enjoys interacting with entrepreneurs and helping them grow their businesses. He writes on topics of interest to small business owners including business finances, technology in business, and digital marketing.|
Top 5 metrics Your Business Should be Measuring on a Daily Or Weekly Basis
As a small business owner you know you must stay on top of your finances to make sure your business is running smoothly. There are many useful metrics you should be paying attention to, but not all need to be tracked on a daily or weekly basis as their values do not change as frequently. Two examples would be Return on Investment and Debt to Equity Ratio. In this article are five metrics that would be beneficial to track on a more frequent (daily or weekly) basis to give you greater insights into your business.
Obviously, an important metric to look at is sales. However, taking it a step further, you can get more insight into your business if you compare your sales to a prior period or to industry benchmarks. Also, try to segment your sales data by divisions or product lines to see how well each area is performing. Sales data does not have to be just a dollar amount. You could measure sales in terms of number of units sold, or you could measure data that would potentially lead to a sale such as number of appointments booked, for example.
Gross Margin % and/or Contribution Margin $
The Gross Margin Ratio is helpful to track on a frequent basis because this number tells you how much profit you made after you take out the actual cost of the product. This number is useful to help you solidify your pricing strategy. Simply divide your Gross Margin total by your Net Sales to get your Gross Margin percentage.
Contribution Margin is similar to Gross Margin. However, Contribution Margin takes into account variable expenses associated with the sale. This number is helpful in determining the true profit of each sale. To calculate your Contribution Margin, first calculate your sales per unit (or service rendered), Then subtract the total variable costs to produce that unit (or service). This will give you your Contribution Margin in a dollar amount. Your variable costs are the costs incurred directly because of the sale. For example, you could add into your variable cost the percentage of the salesperson's' salary. There is a lot of management discretion with this calculation.
Operating Expenses (as a percentage of sales)
One way to make sure your expenses stay in line is to look at your operating expenses as a percentage of sales. Just divide the total of an expense category (e.g. Payroll) by your total sales and then compare it to a prior period to ensure you are on track. For example, if you normally spend 7% of sales on payroll and last week you spent 15% you now know that you went over and it may warrant an adjustment.
Inventory Turnover Ratio
A lot of small businesses tie up crucial cash in inventory. By staying on top of inventory metrics you will be able to ensure you are not over-buying or under-buying inventory and potentially losing sales. The Inventory Turnover Ratio is simply your Cost of Goods Sold divided by your Average Inventory for a period of time. To get your Average Inventory, just take the sum of your beginning inventory and ending inventory and divide by two. A higher Inventory Turnover is ideal as this means that you are more efficient at managing inventory.
This metric tells you how well you will be able to meet short term obligations, such as Accounts Payable and Payroll. The reason why this ratio is called "quick" is because it tells you how quickly you would be able to pay off your obligations. Simply take the sum of your assets that can be "quickly" liquidated and divide it by your current liabilities. You are striving for a ratio greater than 1. You will want to exclude some of your assets such as inventory because they would (probably) not be able to be quickly liquidated.
By tracking these metrics on a consistent basis you will be able to spot trends and manage your business more effectively.
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