Operating a successful business requires that you keep a finger consistently on the pulse of your company finances. In order to do this properly, you’ll need to recognize key indicators that give you a concrete and actionable picture of how you’re doing. Let’s look at some examples.
Revenue & Expenses
First and foremost, it’s critical to know what performance indicators are illustrative of your revenue and its relationship with your expenses. Calculating gross profit margin, for instance, will guide you in pricing so that you can make enough to pay expenses and end up with the profit you’re looking for. You’ll also need to monitor your net profit margin — which determines what amount of your revenue is profit — and of course, your net profit itself. Meanwhile, what do you have immediately onhand to cover expenses and fund operations? By subtracting existing liabilities from existing assets, you can determine this, your working capital.
What You Owe
A business has an obligation to pay employees, vendors, the CRA, and other creditors on time and without straining the assets of the company. There are a few KPIs to keep an eye on in this department. Your current ratio, for example, is calculated by dividing your current assets by your current liabilities, revealing how comfortably you can pay who needs to be paid. Additionally, accounts payable turnover is a useful metric for observing how promptly and reliably you meet these obligations, particularly when examined over time. This is calculated by selecting a time period and dividing its total costs by its average accounts payable.
What You’re Owed
Not only does your business have creditors to pay, it is also a creditor itself. Several indicators are designed to monitor the rate and consistency at which you’re paid what you’re owed. Try carrying out an accounts receivable aging report in order to ascertain the amount of time that each debtor takes to make good on their account. You could use this to determine the interest you should charge for outstanding bills. Accounts receivable turnover, which is calculated much the same way as accounts payable turnover, can also give you a broader look at this aspect of your cash flow and guide any corrections you make in managing receivables.
There are many more financial performance indicators that every Calgary business owner should be aware of. At Cook & Company, it’s our job to provide the knowledge and resources your company needs to perform at its absolute best. Call us at (403) 398-2486 to learn more!