Business financial metrics are essential to learning how your company truly operates, so it makes sense that you would want to know absolutely everything that there is about them.
As an entrepreneur, you have to wear many hats and be knowledgeable in many different disciplines.
From knowing your product or service inside out, to being able to talk to your customers and clients, to showing the leadership skill that your employees need in order to bring out the best that they have, your role as the owner of the company is one that will demand everything you’ve got.
But it can all be for nothing if you don’t know about the different aspects of finance that serve to keep you in business.
This post will look at some of those areas, provide explanations about what each one is, and show you what you can do in order to make sure that your business thrives in these areas so that it’s able to thrive as a company.
So, if you’re ready to learn more about business financial metrics and what they mean for you, then keep reading this page.
Cash Flow
When thinking of your company’s cash flow, think of the money that comes in as well as the money that goes out.
You get money from your customers and clients, and you spend money on things like payroll, utilities, equipment, and other expenses that keep operations going.
But knowing about your cash flow can involve more than staying up to date on those things.
This is an important aspect of finance to monitor because keeping track of how much you make as well as how much you spend will give you an accurate picture of how financially stable your company is; making it an especially important piece of information to keep in mind during the company’s formative years.
It goes without saying that you want your business to have a positive cash flow, which is the scenario of more money coming in than going out. Doing this will help you create a stable, growing business venture that will be able to maintain strong bank relationships, as well as attract investors who can inject the company with the kind of capital that will help it expand as it moves forward.
Return on Investment
Your return on investment, or ROI, will let you know just how successful a certain aspect or project is. As far as business financial metrics go, this is one that will involve several different areas.
Think about this scenario: You want to promote a new product that you’ve just developed, and you feel as though the best way to do that is through an advertising campaign.
This could possibly involve magazines ads, television airtime, online ads, billboards, and a number of other places where potential customers could see what you have to offer.
But you have to ask yourself if it will all be worth it.
Figuring out what the potential ROI will be on something is an important process that you will constantly have to undertake as a business owner. Be warned that the different variables can make this one of the more challenging business financial metrics that you will have to identify.
In a scenario like advertising, for instance, your ROI could depend not only on what you offer, but how good the marketing firm you hire is as well.
And that’s just the beginning of it.
When trying to figure out a return on investment, you have to be certain that the risk (the money you will spend) will be worth the reward that you hope to obtain.
Break Even Point
When your gains and losses are equal, you have officially broken even.
Knowing your company’s break even point is one of the important business financial metrics that you need to be aware of because it not only shows progress, but indicates that the practices you have been utilizing up until that point are working.
Of course, as I stated earlier, it’s better for your gains to be greater than your losses, but hitting your break even point is a good start to reaching this important milestone.
You want to turn your revenue into potential profit. Using business financial metrics like your break even point as a guide will allow you to examine your practices as far as production and selling are concerned to determine what you need to do in order to progress as a business venture.
Gross Margin
Speaking of making money, your gross margin is an important metric to get to know because it will show you exactly how other people view your business.
Say you want to take your operation well beyond what it initially started out as. You may want to open a branch in the next city, state, or well across the country.
To do that, you’ll likely need investors.
Those investors will use financial analysis to examine business financial metrics like your gross margin and determine whether or not the venture will be worth their money.
In most cases, your gross margin will be compared to that of many other companies in your sector so that these investors can see just how your company operates and if you’re poised to outdo your competitors.
In the case of any activity that can directly, or even indirectly, affect your gross margin, you want to do whatever you can to increase it and show your investors that their money will be well spent if they entrust you with it.
Making Your Way There
The road to success in running a small business is a long, but rewarding one. It’s a constant learning process that involves not only acquiring the skill to actually run the business, but learning how to manage people, and keep up with the rest of the industry as well.
From having the right business coaching, to making sure that your business plan is strong enough to provide guidance, but flexible enough to accommodate change, you want to be as a business savvy as possible when taking the lead.
That includes making sure you’re aware of the different business financial metrics that will show you the true state of your business and what you need to do in order to make great strides in the future.
Remember, running a business successfully does not need to be complicated. Keep it simple!
For more information on business analysis, business planning, and ways to grow your small business profitably, please check out our website www.portalcfo.com. Follow us on Twitter @portalcfo
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Manny Skevofilax is a consultant and speaker that helps his clients successfully navigate the challenges of growing their businesses profitably. Since 2003, Manny helps businesses enhance their results by using his experience in strategic planning, financial statement analysis, operations, organizational development, and team-building. His consulting firm, PORTAL CFO Consulting, Inc., has attracted clients from diverse industries in the United States and abroad.
Manny can be reached at 410-808-3441 or via email at manny@portalcfo.com.