Five Ways To Measure Small Business Performance
Your small business may be doing great, but are you really sure it's performing as well as you think? Your gut may tell you that everything's perfect, but you also need to know what the numbers say. If your accounting performance metrics aren't looking the way you hoped, you'll know it's definitely time to make some changes. Until you're sure of the numbers your business is producing, you won't have a clear understanding of your current or projected future success. Here are five key metrics that you should know, in order to empower your small business.
1). Your Gross Profit Margin
The gross profit margin for your business is an indication of whether you're pricing what you're selling the right way. Price it too low and you won't make enough of a profit, but the same can be said for goods or services that are priced too high. The higher cost often means these items don't sell, so you lose out - but when you do sell one, the margin between what the service or good costs you and what you make from that good or service is significant. Your gross profit margin is your revenue minus your cost of goods sold, divided by your revenue.
2). Your Total Net Profit
When you hear people talk about their bottom line, it's their net profit they mean. The revenue you bring in might be high, but if your expenses are also high you might not be making much actual profit. Gross profits are only one gauge of whether your company is doing well. You can find your net profit by taking your gross profit (revenue) and subtracting your expenses. Whatever is left over is the amount your business made in true profit, after paying costs, bills, and other types of expenses. If you don't like your net profit numbers, you may have to find a way to bring in more revenue. Alternatively, you could look for ways to reduce your expenses, which could also be effective.
3). Your Net Profit Margin
Once you've figured out your net profit, you should also take a look at that profit margin. This will show you what percentage of the revenue you took in from doing business was actually your profit. To get this figure, you can take your net profit number and simply divide it by your total revenue. It's an easy calculation, but one that your small business really shouldn't be ignoring. You can set benchmarks and goals when you know this percentage, and you can also project and predict what your future profits might be, so you can see how and where you may need or want to make changes.
4). Your Current Asset/Liability Ratio
The ratio of your assets to your liabilities, also often just called the Current Ratio, gives you a strong indication of how well your business is able to pay its bills. By dividing your current assets by your current liabilities, you will get that ratio. Even businesses who seem to be doing well can have trouble paying their bills if they have too many liabilities and not enough assets. If your small business has a very high ratio, though, it's also possible that you have too many current assets. Some of those could be potentially moved into other, longer-term assets that would allow you to maximize your profits, along with your growth and development.
5). The Age of Accounts Receivable
How long your accounts receivable have been waiting to be received is also very important. If there is a lot of money owed to your company and you can't seem to get people to pay you on time, that's a part of your small business' plan that you may need to adjust. You could start charging interest for past-due accounts, for example, after informing all clients of the changes that will be made. Some small businesses also choose to let slow-paying clients go, and won't work with them anymore. Especially for a small business, cash flow problems can become a serious issue. Fortunately, you have some control over a number of those problems, and working with clients to make sure they pay their debts to you promptly is part of that control.
Your small business may have the potential for great success, but if you're not sure about where you currently stand, it's time to do some number-crunching and make sure you're doing as well as you think you are. Periodically taking a look at your accounting performance metrics can keep your business on track, and also help you make changes to a small issue before it has the chance to become a bigger problem. That's not just financially smart. It's also peace of mind.
If you own a small business and are looking for ways to utilize the information on your financial statements call (214) 600-8609 to discuss your situation.