I felt the vehicle I was driving stop gradually. I wondered what was wrong now. Upon further examination, I realized I had a flat tire.
There is hardly a good time for a flat tire, especially when you are heading to work.
My first vehicle didn’t have working indicators on the dashboard. That meant I could be driving and be unaware if the fuel tank was on empty, if the tire pressure was low, or even if the engine was overheating. That led to so many sudden stops or interruptions, which was highly frustrating.
Your business likewise needs the right indicators to guide you along to make the best decisions, to make timely strategic moves.
As a CEO/Entrepreneur it is important to measure the performance of your business/company regularly. You made five or six figures in sales – was it profitable? How much did it actually cost you to make those sales? Are your team members being efficient or are they wasting time, taking too much time to do tasks?
When you know the answer to these questions plus more you will be innovative as well as proactive. You will be ready to grasp opportunities quickly when they appear.
Using key metrics or key indicators in your business enhance your decision making and also help you as the CEO/Entrepreneur or business owner to do more of what works and less of what does not. Key metrics or key indicators affect all areas of your company/business – financial, operations, human resources and so on.
The following are key metrics/indicators which will apply to most businesses:
NET PROFIT MARGIN
This tells you how profitable were your sales. This compares your sales to all expenses to determine what profits are. This will help to determine how your business is performing to the industry and your competitors as well.
LABOR COST RATIO
How efficient is your team? Are they wasting time or taking too long to complete tasks? What about overtime, are you paying too much? This ratio focuses on the performance of your team compared to the sales of your company/business.
Two time frames in the business world are short and long term. Short term refers to the length of time under a year. If you had to pay all your short term obligations such as creditors tomorrow- would you be able to do that? The current ratio will prove this. It helps to assess if you have enough access to cash based on the short term needs of your business.
GROSS PROFIT MARGIN
How much of your revenue is profit after looking at only those costs that are directly related to the sales of your business? Not all costs are equal and as a CEO/Business it is important to know this. Are you sales costing you too much in direct related costs? This metrics helps to assess just strong your sales are as well as if your expenses will be covered by your sales.
ACCOUNTS RECEIVABLE TURNOVER
Are you being paid timely by those who owe you? Based on your payment plans with clients/customers are you being paid on time? Compared to the date of your sales and the date of your unpaid amounts is it too high or a cause for concern? This ratio addresses this area in your business. A higher ratio is better than a lower one!
I was very happy when I changed my vehicle to one that had working indicators. No longer was I driving and being unsure about the state of my vehicle. I felt relieved in addition to not being at the mercy of surprises from a malfunctioned vehicle.
Your business can operate more efficiently and profitably using the right indicators and metrics. No longer will you be surprised if you have a bank overdraft “suddenly” or if you are faced with a “huge” tax bill. Using key metrics/indicators in your business is exciting and fun. Start using them today!
When business owners find their businesses in financial chaos and are serious about taking the leap to say hello to cashflow and more, they reach out to Kirsha Campbell, “The Cashflow Maven.” A CPA/CMA, Kirsha integrates all the moving parts in your business to set up the right foundation to be recession proof, operate with reduced risk, increase cashflow, and set up effective systems and procedures. Kirsha helps business owners say goodbye to being overwhelmed, stressed, and frustrated about their businesses’ results and operations. Visit Kirsha on LinkedIn.