I want to continue with the one of my most popular series on secrets to profitability. One of the secrets I’ve seen successful companies use to harness more profits is the sue of specific financial metrics.
Your business may be great at producing a product, great at satisfying customers, even great at keeping employees happy. But how good is it at making money? That’s the real question the implementation of the right financial metrics should answer. Focus on the right high-level and business-specific metrics that are tied into your company’s strategic plan, and you’re going to get closer to your financial goals (hopefully to be more profitable). Focus on the wrong metrics that are either outdated or not relevant for the size of your business and you could actually be harming your progress.
Given the unique nature of every business and how financial and performance metrics must be tailored to the business’s situation for success, I won’t outline good and bad metrics in this post. I will, however, discuss some key benefits that your metrics should provide and provide some very basic metrics that all companies should use—these are in no way an exhaustive list. Your company should have a handful of financial metrics and a handful of performance metrics that it uses. We can help you select the right metrics your business should use, and the methods by which you can collect that information.
Benefits
- Relevant financial metrics are the best way of attaining timely and accurate information in regard to progress toward goals and initiatives
- Financial metrics help businesses make right investment decisions, evaluate their current investments, and help to prevent future judgment errors
- Financial metrics help managers and other decision makers in a business become proactive. They restore their confidence and help them make decisions on which they can act.
Some commons ratios that wise business managers commonly review include:
- Pre-Tax Net Profit Margin. A higher margin produces more profit. This should be the first metric in your arsenal. But beware to not chase that extra penny at the expense of some of you other critical performance ratios—like customer satisfaction and experience.
- Current Ratio and Quick Ratio. Knowing the amount of current assets you have compared to your current liabilities is crucial when making short-term decisions. A company absolutely does not want to run out of money. This metric should be taken in context with the entire business, however, as long-term debt can be leveraged for not only higher profitability but also better current ratios.
- Days in Accounts Receivable & Payable. These two ratios count the days the average accounts receivable and payable stay in your company. You want your cash quickly but you want to pay your supplier slowly—keeping cash in your business.
