There are a lot of numbers in a small business. Most entrepreneurs do a lousy job of reviewing their financial statements while trying to manage their business. However, numbers are a very powerful tool in business to measure results against your goals.
Here are 5 things that need to be measured in your business:
1 . The Quick Ratio (or “The Acid Test”) on the balance sheet. This is your business’ current amount of assets (cash, cash equivalents, accounts receivables) divided by current liabilities. A favorite metric of your bank, the quick ratio is a measure of the financial stability of your business. In most industries, the quick ratio should be greater than one. It shows that your business has more cash available than current money it owes. Warning: When the ratio goes below 1 it means your business may not be able to meet its financial commitments.
2. Your business’ sales close ratio. Of all the prospects your business writes proposals for, how many do you win? This is a key number since it should not be too low or too high. Warning: If it is too high, your business is not talking to enough prospects or your prices are too low. If it is too low, you may not be qualifying your prospects enough before preparing proposals for them.
3. Who are your ten most important customers? This is measured not only by revenue, but also by their referrals, the additional products they buy, feedback they give, retention, or their superior brand power. Warning: If you don’t focus on your most important customers, someone else will.
4. The average number of days it takes for your customers to pay (DSO). A smaller the number is better. This will enable your business to use the cash quicker by reinvesting or taking it out as profit. The number should be 133 percent of your payment terms with your customer. For example, if your terms are 30 days, your DSO should be 40. Warning: If the DSO is too high, cash is getting trapped inside your business and what you pay yourself will go down.
5. How much positive operating cash flow did your business produce last month? Profit is important, but cash flow is king. This number is found in your business cash flow statements. By definition, cash flow is your monthly profit, plus the change in accounts payable, the change in accounts receivable, and the change in inventory. The higher this number is monthly, the healthier your company is. Warning: If your cash flow is negative for long enough, it will lead to the demise of your business.
What other things do you measure?
Barry Moltz helps get small businesses unstuck. He is a popular speaker and author of four business books. He can be found at www.barrymoltz.com
This article is from the SmallBizLady special blog series: 31 Ways to Boost Your Small Business in 2013. #Boost2013
Great tips, loved the article.
Very useful!
I have received a dose of ‘re-awakening the slumbering giant pill.’ 2013 here I come into my own business world. Thanks to Melinda.