Many big organization owners, who have earned millions and built several companies, sometimes feel that they are inadequate as a potential investor. Specifically, they also feel an inability in reading the company’s financial statement, including the balance sheet, cash flow statement, etc., for determining the health and value of the company. For such business owner, it is important for them to learn how to read their financial records, analyse them, and evaluate the result. In order to make them understand, here are some of the financial metrics and key performance indicators. Every entrepreneur needs to know the financial metrics given below to run a successful business.
- Real Revenue: Many people make assumptions that the sale is their actual revenue. However, the revenue is the cash received in hand. If you have the perception that you sell something and do not get paid right away and you feel that it is okay, then you are mistaken as cash flow is the king, and late payments can make you go out of business. So, make sure that you get paid right away or in a short period of time to run your business smoothly.
- Real Profit: The real profit is not the money you made from your sales. Specifically, the real profit is the money you get after paying all your expenses and taxes. While looking at the expense of the company, make sure you do not mix your personal expenses in business expenses to lower your profit and tax liability.
- Gross Margin: Precisely, the gross margin is the company’s net sales revenue minus its cost of goods sold. In other words, it is the company’s sales revenue that is retained after incurring the direct costs correlated with the sale of goods produce and service provided. In order to make a profit and smooth running of the business, make sure that your gross margin is above 50%.
- Cashflow is sovereign: As an entrepreneur, you can be doing a million dollars business in a month in sales, and still, you can go bankrupt. If in your company you to build the product and sell it through a channel of distribution channel, then you have to wait for like two to three months or a longer period to get paid. Such type of business model is unattainable in the long run unless the volume of your sales is high, and you start with a large cash reserve, or your gross margin is higher by 75%, then only you can afford the delay in your actual received revenue. Always remember that cash is the fuel for your business, and you should do everything to maximize your cash flow.
- Accounts Payable: As an entrepreneur or a small business owner, you need to understand that you should not spend money on things that are not important. Try to avoid leases with no out clause, avoid those equipment that are of no use, and try to keep your business lean. Try to negotiate in everything you purchase. This will help you in growing your business and will automatically impact your future potential.
- Accounts Receivable: Precisely, accounts receivable is the money that other companies owe you. Make sure that you get all the bill cleared on time so that you can run your business effectively without having any bills or salary of the staff due reason being that your accounts receivables are due. You can also hire an accounts receivable contractor who can get the payments and clear all the past due bills by being aggressive and without being offensive. Make sure that you have the correct processes to get paid on time.
- Utilization of Employee: Employee utilization is one area that usually gets ignored by most of the entrepreneurs and small business owners. Therefore, if you own a business, then it is important for you to pay attention to utilizing each and every employee of your company. If it is possible for you, assign billable or revenue hours to your employees in order to measure the impact of employees on the overall revenue. Through this process, you can easily evaluate where the most revenue contributions are made and how much revenue you can make per employee before you hire another employee to avoid employee weariness.
The mentioned seven financial metrics are important for every entrepreneur and business owner to avoid getting bankrupt and for the smooth running of the business. Each metrics mentioned above provides a different insight into the operational efficiency of a company and help the business owner to get success every time.
Source – Forbes