In order to grow and build a successful business, decision makers must be presented with the right information. “I speak with several business owners, CFOs, and controllers on a regular basis and when the topic of business metrics comes up they aren’t always clear on which direction they should be looking,” says Thomas C. Yankanich, Director, Audit & Accounting at Kreischer Miller.
Business metrics are used to track, monitor, and help analyze the business and provide stakeholders with the tools needed to make decisions. We interviewed Yankanich for the May issue of Insights from Kreischer Miller about how to determine which key financial metrics will best measure your company’s performance.
When businesses begin the process of determining which financial metrics are right for them, what items should they initially consider?
In determining which financial metrics are right for your business, ask yourself the following:
- What is my ultimate goal?
- What information can I use to define progress, success, or failure?
- What variable(s) will influence the outcome of the goal?
- How will I know when the goal is achieved?
- What timeframe would I like to use for measuring the goal?
How can a business determine where its performance stands in relation to the rest of its industry?
One of the first things I typically ask a new client when I start working with them is whether they subscribe to any industry benchmarking reports. Benchmarking reports are available for a wide array of industries and provide a cheat sheet of key metrics that business owners should be thinking about. The other benefit of benchmarking reports is that the metrics are often broken down by company size and geographic region. Utilizing benchmark data can give you a thorough understanding your business’ competitiveness, efficiency, and strength.
What are some of the key metrics business owners should consider?
Business owners should consider the following:
- Profit and Loss. Assessing profits and loss seems obvious, but some businesses aren’t monitoring this closely enough. Every quarter, businesses should review their profit and loss report. This serves as the clearest snapshot to help guide a business owner on future decisions.
- Average Cost of Customer Acquisition. Acquiring new customers is hard work, but many business owners don’t understand what goes into it. It ultimately comes down to the fact that you can’t achieve sustainable growth if you are losing money on every customer you bring in. Once you have an idea of the cost to acquire a customer, you can assess whether you can cut those costs to become more profitable.
- Cash Flow. Cash flow is generally the most telling metric as cash and liquidity are the backbone of any company. If there aren’t processes in place to monitor cash flow, business owners can find themselves in a quandary when it comes time to make essential payments. Measuring cash flow by monitoring cash burn rate (monthly cash spent) and runway (how much you can operate based on cash on hand) is a critical metric that should be considered on a monthly basis.
- Earnings of the Company Before Interest, Taxes, Depreciation, and Amortization (EBITDA). EBITDA is often used to measure a business’s ability to generate income and is a handy tool used to normalize a company’s results. EBITDA focuses on the operating decisions of a business because it looks at profitability from core operations before the impact of capital structure, leverage, and non-cash items.
- Return on Equity. Return on Equity measures the business’s net income in contrast to net worth. A business’s return on equity ratio both informs you of the amount of your profitability and quantifies your general operational and financial management efficiency.
- Debt to Equity Ratio. The debt to equity ratio measures how the business is funding growth and how effectively it is using shareholder investments. The number indicates how profitable the business is and tells owners how much debt it has accrued in order to become profitable.
Ultimately, determining the right set of financial metrics for your business will depend on your business type, size, and industry. While this process can be challenging, it is highly beneficial and your findings will allow management and owners to focus their efforts on continuously adding value to the business.●
You may also like: