Most small business owners place greater emphasis on losses than on gains, focusing on one or two adverse events and neglecting overall operational strategies.
Aside from perpetuating negativity, these individuals truly are unable to plan how to navigate fluctuating circumstances. A much superior approach, used by savvy business owners, is to review monthly those factors connected to your business’s general financial health. This places the spotlight on the positive rather than the negative.
Any actions you take have causal connections to measurable key performance indicators (KPIs). Most often, knee-jerk reactions to crises result in errors and more crises. But not if you focus on the following KPIs:
Gross profit margins
To ensure long-term success, you must master the skill of correct pricing. Develop skillful pricing habits by tuning in to your gross profit margin. It’s common sense: Subtract cost of goods sold from revenue and then divide by revenue. Finally, multiply by 100 to derive your gross profit margin percentage.
The costs of goods sold are expenditures directly connected to sales-the cost of materials or products that are resold to customers. But included in costs of goods sold are direct labor costs. Depending on your industry, costs of goods sold may include amounts paid for subcontractors or special tools needed for projects.
Operations with continuous sales to numerous customers are concerned with gross profit margin over specific periods. A business that conducts a number of jobs that each last several weeks should quantify the gross profit margin for each job.
Gross profit margin must remain sufficiently large enough to cover operating expenses and leave a net profit. So you’ll need to compare gross profit with net profit.
Your bottom line-the amount of cash left after paying all the bills-is net profit. To determine how fast it’s increasing, take your net profit from a recent period (Period A) and net profit from the same period the year before (Period B). Subtract B from A, and then divide by B. Multiply by 100 to get the percentage increase.
Repeat this formula to find the percentage increase for gross profit.
If gross profit doesn’t move in tandem with net profit, any rise in net profit is unsustainable. While you can increase net profit for a while by cutting expenses, this isn’t a good long-term strategy. Ultimately, gross profit increases pave the way to higher net profit.
Current ratio assesses the ability of a business to pay its bills. To use this analytical measure, divide all current assets by current liabilities. Current assets are cash, accounts receivable, and inventory. Current liabilities are accounts payable and upcoming loan payments, as well as sales and payroll taxes that are collected but not yet remitted. If your current ratio is less than 1, you lack sufficient cash (or other easily convertible assets) to pay your bills.
These key performance indicators warn you of potential problems while they are still solvable. Without focusing on these KPIs, you’ll be managing by knee-jerk reaction.