Regardless of the type of business you’re running, actively monitoring a few key numbers is often what’s needed to keep your company growing and prosperous.
A company’s key financial indicators often fall into one or more of the following categories:
- Order volume. Find the metric of orders that makes sense for your business. Then measure the number of orders versus last month and last year. Then look at year to date numbers and compare them to last year. Are you selling more units over time? Tracking revenue alone may present a false picture. After all, revenue may be growing because prices have increased. If unit sales are declining, you might be losing market share.
- Breakeven point. If you need $100,000 per month to cover fixed and variable costs, you need to know if you’re selling enough products or providing enough services to break even. If you’re dipping into reserves to cover revenue shortfalls, adjustments may be required. So calculate and know this number for your business.
- Liquidity. Knowing the availability of cash is vital to every business. That’s why reconciling the firm’s bank statements in a timely fashion shouldn’t be an afterthought. Every month ensure that your general ledger agrees with the bank’s records of deposits and withdrawals. If a company is losing cash, the bank statements should tell the story.
- Inventory Turnover. This number shows how many times your company sells and replaces inventory during a given period. The higher the number, the better. Assume your company’s cost of goods sold for 2022 was $100,000, beginning inventory on January 1, 2022 was $10,000, and ending inventory on December 31, 2022 was $15,000 (for an average of $12,500). Your cost of goods sold of $100,000 divided by $12,500 equals a turnover ratio of 8.0. Banks and investors love to look at this number as the higher the turnover, the less likely you cannot change the inventory back into cash by selling it.
- Payroll (and Contractor) Percentage. Take your total payroll costs (including benefits) add contractor costs and divide it by net sales. This percent of sales is then compared to budget and prior years. Try to maintain or shrink this percent. Don’t forget to add part-time and contract workers to this total, as many businesses are relying more on this source of workers in this tight labor market.
Over time your business’s vital numbers may change. The key is to know your company, identify changing conditions and adapt.