In recent months, while at networking events both in person and virtually, I've noticed a lot of conversations with successful entrepreneurs and small business owners eventually gravitate towards the importance of their metrics. The availability of information and data these days is at an all time high, so why not utilize what's out there and help it improve your business. Most successful small businesses have valuable metrics that help predict their revenue growth, forecast busy times and slow times, understand customer trends, the list just goes on and on. The reason I say 'most' businesses and not 'all' businesses is that some business owners fly by the seat of their pants and don't have a grasp of what really drives their business. To me, these business owners are doing a disservice to their business and employees by not harnessing the profitability of their business, but that's a conversation for another time.
Assuming your business has a great bookkeeping system in place, here are a few simple small business metrics that are available with a few clicks of a button. If you don't have confidence in your bookkeeper's ability to produce 100% accurate information then maybe they need some QuickBooks training, or maybe they should be replaced all together. Either way, we as outsourced bookkeepers can help with both.
Fixed Monthly Costs
Monthly fixed costs tell you how much money will be needed to keep the lights on regardless of increases or decreases in your income. Not only knowing monthly average fixed costs but knowing when the expenses increase and decrease throughout the year gives great insight to cash flow. For instance, if annual fixed costs generate a monthly average of $9,000 but April spikes to $13,500 each year because insurance payments are due allows for proper planning in a timely manner. Knowing your monthly average can greatly assist in cash flow analysis and break even analysis, which are great metrics to look at each month or quarter.
To get your monthly fixed costs look at your Profit & Loss report for the past 5 years and separate the data by years. This will show if the expenses are somewhat static year to year or if they are all over the place. After some analyzing the yearly amounts, divide the annual amount by 12. The next step would be to view each year broken down by month. Make notes if monthly amounts are above or below the average. Research anything that jumps out. This quick analysis can really tell some powerful info about not only the business but your bookkeeper's ability to analyze real time data about your business.
Gross And Net Profit Margins
Having a grasp on both gross profit margins and net profits margins can allow for some powerful analytics. Knowing your gross profit margin can tell you if you are priced right or if a certain Cost of Goods Sold is causing your pricing to lose you money. If your margins are thin and shipping costs increase then you might have to adjust your product costs to avoid dipping below that break even metric you generated. Net profit margins show the overall margins of the company after both variable and fixed costs are taken into account. Knowing your historical net profit margin and then comparing certain time periods to it should show if your business has any cyclical patterns that might impact budgeting and forecasting.
These values are easy to obtain when viewing your Profit & Loss report. QuickBooks makes this a few clicks of a mouse. Simply customize the report and choose the option to show % Of Income. Look as this value for a large time frame like a few years then start diving into monthly or quarterly time frames.
Customer Effective Rates
Knowing if you are making or losing money on your hard work is a pretty important piece of information every single business owner should know. For a service based industry, you live and die by your customer's effective rate. This calculation is pretty easy as long as the info is being recorded in a timely and consistent manner. Take the amount of money you have billed your client and divide it by the time spent on that client. If you are an accounting firm charging an hourly rate of $175 and a client's effective rate is $35 per hour wouldn't you want to know that? Having a list of all clients' effective rate can give the support for increasing their rate or lowering it. If a client's effective rate is double the rate you are charging them then you better bend over backwards for them if they ever ask for something extra once a year. Otherwise you might lose them and end up with a customer base of crappy effective rates.
This metric is somewhat trickier to nail down if proper info isn't being recorded by your employees. Make sure employees are recording their client time as accurately as possible or risk firing your best client and dedicating too much time to your worst one.
As the business grows and revenues increase, there are several great financial analytical tools out there to help analyze your small business metrics. However, a smaller business may have a tough time justifying these costs. You don't need higher math to figure these metrics out so hopefully your bookkeeping is up to date and 100% accurate. If not, let's talk. Once these simple metrics are analyzed you can start asking those tough questions like "Can we increase our sales 40% next year and give everyone raises?"