You don’t need to be a math wizard to understand which numbers can tell you how well or how poorly your business is doing.
But you do need regular financial updates and the discipline to sit down and check the key performance indicators that matter most: sales, profit margins and cash flow.
Modern accounting software makes it easy to generate financial statements so you can perform some quick calculations to check the financial health of your business.
Here a few key areas that should be monitored monthly to enhance the opportunity of success.
1. Growth
Are your sales and profits increasing or decreasing year-over-year? Is there a trend?
2. Gross profit margin
Indicates the profitability of the business and reflects your control over cost of sales and pricing. You may want to compare this ratio with prior financial periods or industry data.
3. Inventory turnover and Customer Base
Measuring the number of days it takes to sell inventory allows you to adjust your pricing or marketing. A low number means stock is being sold quickly. In addition to profitability, a growing customer base is a sure sign that you are effectively reaching your target market, and reaching your target market is what your business is all about. The long-term growth of your company is tied directly to your ability to not only reach your customer base, but to expand it to accommodate your long-term goals.
4. Liquidity
The most common liquidity ratio is the current ratio, the ratio of current assets to current liabilities. This ratio indicates a company's ability to pay its short-term bills. A ratio of greater than one is usually a minimum because anything less than one means the company has more liabilities than assets. A high ratio indicates more of a safety cushion, which increases flexibility because some of the inventory items and receivable balances may not be easily convertible to cash. Companies can improve the current ratio by paying down debt, converting short-term debt into long-term debt, collecting its receivables faster and buying inventory only when necessary.
These are a few of the measures to check regularly. I hope the comments help.
gerry@polarisgroupmc.com
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