4 Critical Metrics For Making Better Business Decisions

As a business owner, you probably don’t have a lot of time to spend analyzing your financial data. By taking a few minutes each month to track just four important metrics, you can understand where your business is performing well and quickly spot areas of concern. Let’s look more closely at these four financial indicators that are critical for most companies.

As a business owner, you probably don’t have a lot of time to spend analyzing your financial data. However, by taking a few minutes each month to track just four important metrics, you can understand where your business is performing well and quickly spot areas of concern.

Each organization and industry is unique, of course, and so the most important metrics to track monthly can depend on your business. However, the following four financial indicators are critical for most companies.  The indicators are generally applicable to B2B (business to business) companies but may be relevant for B2C (business to consumer) companies as well.

1. Customer concentration

Customer concentration looks at how much of your company’s revenue is from your top customers—and essentially shows you how dependent you are on those customers. As with your personal investments, it’s risky to place all your eggs in one or two baskets. Ideally, you want your business revenue spread across several different customers, so that if one customer relationship ends, you still have plenty of other revenue sources.

It’s worth spending a little time each month quantifying how much of your revenue comes from your top three or five customers. Consider the scenario of a client leaving that makes up a third of your revenue. What would the implications of that be to your broader business and is that too much to risk? 

How much risk you’re willing to take when it comes to customer concentration is ultimately up to you—but by knowing what percentage of your total revenue your top customers comprise, you can take steps to diversify and broaden your customer base to reduce risk.

2. Gross margin

Gross margin is the difference between revenue and the cost of goods sold, expressed as a percentage. Here’s a simple example: Say you sell a product for $5 that cost you $2 to make, resulting in a net of $3; your gross margin would be 60% ($3 divided by $5).

Knowing your gross margin for individual products or services can help you focus your attention on the right parts of your business. For example, if you find that one product has a 40% gross margin while another’s margin is just 5%, you may want to spend more effort and resources on the product with the higher margin.

3. Cash needs

Cash is king, as the saying goes — and you want to make sure your business always has enough on hand to cover your expenses and protect it in case of an economic downturn or emergency.

To do this, you’ll want to calculate how many times your current cash balances will be able to cover your expected expenses, says Jeannette Hobson, group chair with Vistage International, a peer mentoring organization for business owners and executives. For example, if your usual monthly operating expenses are $2,000 and you currently have $5,000 in the bank, you should be able to cover expenses for the next two and a half months—even if your revenue declines a lot or your customers don’t timely pay the receivables they owe to you.

Again, there’s no standard cash-balance-versus-monthly-expenses multiple that every business needs to adhere to but, generally speaking, you want to have enough cash to cover at least three months’ worth of expenses, Hobson says. And if you don’t have that, you may want to get a credit line or loan that can be relied on in case of a cash shortfall.

Particularly for uncertain economic times, it’s important to know that your cash can cover your expenses if revenue isn’t consistent.

4. Accounts receivable aging

Accounts receivable aging is simply a list of your current unpaid invoice balances that shows how long they’ve been outstanding. It’s important to follow this because it can help you identify potentially problematic customers and take corrective measures.

For example, if your accounts receivable aging report shows that a customer has been slower to pay you, it could indicate that the customer is having financial problems. In that case, you’ll want to closely monitor the status of your expected payments from that customer—and pursue the receivables more frequently and perhaps more aggressively.

Follow the trends

Beyond calculating these metrics each month, watch for any longer-term changes or trends that may provide valuable insight. For example, declining gross margins could mean your costs are going up, your sales price is going down, or both. It may be worth a closer look at strategies for improving those margins.

The key, of course, is having real-time financial data that enables you to make informed decisions. Decimal, which provides a real-time accounting solution along with a human bookkeeper, makes it easy. Your bookkeeper manages your books and can run reports for you and answer any questions you may have—so you can focus on making better decisions and growing your business.

Want to learn more? Talk to our team at Decimal to get a free business consultation and see where your accounting operations can be elevated!