Understanding Business Metrics to Keep Your Business Healthy
It would be difficult to find a business that has not been affected by COVID-19. The pandemic has forced many businesses to re-invent themselves. Some have faced the challenge of migrating their staff to remote work in order to keep operations running. Others have had to find new ways to reach their customers, such as retail stores moving to on-line sales. But, whatever challenges your business has faced over the last several months, there are some things that have not changed. Keeping track of some simple business metrics provides business owners with the information they need regarding their business’s health.
So what exactly are business metrics? Put simply, a business metric is a performance indicator of a particular component of your business that can be quantifiably measured. By using a variety of metrics, business owners are able to see their progress and know they are on a good path or they can see and correct problems. Either way, knowing and understanding these metrics enables them to make better business decisions based on fact. So what are some of the business metrics you should be tracking?
Cash flow: This is a measure of the actual money that comes into the business and the amount that is flowing out. This is more than just looking at a bank balance to see how much money you have at any given time. Understanding cash flow gives insight into how the money is moving. For example, a seasonal business may have some months with a high positive cash flow but then they will have slower months that may show a negative cash flow. But by knowing this, they can adjust their business operations and human capital needs, and plan accordingly.
Accounts payable: This is the total amount of bills and short term debt a business has not paid yet. This is a liability and has an effect on your overall profitability. Managing accounts payable efficiently and paying bills on time helps you build good relationships with your suppliers and keeps your business in strong financial health.
Accounts receivable: Money owed to the business for products or services needs to be tracked because although it will show as an asset on financial statements, it isn’t money in bank. Not all businesses extend credit to their customers, but if you do, terms must be established and a collection policy should be in place. Knowing the average collection period and the aging schedule helps business know if they are on top of receiving payments that are due or if they need to modify and improve upon their collection efforts.
Operating costs: These are the costs that are incurred in the ordinary course of running a business. They include rent or mortgage, employee salaries, office supplies, utilities and more. Controlling operating expenses helps businesses to be profitable.
Net profit: This is also commonly referred to as the bottom line. This is the money that is available after paying all business expenses. These funds can be distributed to owners or investors, put aside as cash reserves, or used to reinvest in the business.
These are not the only metrics that a business should track, but they do help measure a company’s overall financial health. Knowledge, expertise, and experience is the key to understanding the story the numbers reveal and what action to take. That is where accountants and bookkeepers can help. Having a professional team in place to decipher a company’s financial picture enables business owners to navigate through difficult times while recognizing potential opportunities and navigating around potential threats. Our team is here to help you not only by keeping track of the numbers, but by recognizing trends and providing guidance that keeps your business healthy and profitable in any economic climate.