Which metrics are (actually) important?
Knowing the metrics that matter can help you make smart decisions and achieve business goals. Here are seven you should focus on.
1. Liquidity
Take a look at your projections for total sales and revenue over the next month or two—do they cover your expenses? Comfortably?
Liquidity is a financial metric that shows how much cash and inventory your business has on hand, and whether it is enough to cover expenses like debt, accounts payable, and other liabilities.
Businesses that struggle with liquidity struggle to cover costs, pay workers, and pay their debt. Businesses in good financial health have no problem paying these expenses.
2. Profit margin
Profit margins may be the most important metric for a healthy business.
For every dollar that a healthy business earns, it will keep 10%-20% of the revenue as a net profit margin. Every business and every industry is different, but in general, businesses that fall below 10% are lower than average, and higher than 20% are outstanding.
3. Debt
No business owner likes debt, but almost every business model requires it.
Having some debt is not a bad thing, and can even be a sign of a healthy business. Healthy businesses should have a debt ratio that hovers between 0.3 and 0.6, meaning the business’ total debt equals 30-60% of total assets—the lower the better.
4. Conversion rate
How much of your website traffic follows through to make a purchase?
Conversion rate is calculated by dividing the number of customers by the number of people just browsing your website. Healthy businesses will have high conversion rates, which feeds into other healthy metrics, too.
5. Days sales outstanding
How long does it take customers to pay you?
Another key metric is the sales outstanding period. Ideally, you want it to be as low as possible. The timeframe from when you deliver goods to when you are paid should be no longer than 45 days.
Keeping that number low means a consistent cash flow that revenues and profits can be turned around quickly to fund short-term expenses and overall well-being.
6. Cost of goods sold
How much does it cost to create your product?
Calculating the cost of goods sold means adding the total number of expenses related to creating and delivering your product, and subtracting it from the inventory at the end of the year.
The final number allows you to find your gross profit margin and improve the health of your business overall.
7. Customer lifetime value
When a customer purchases your product, do they do it again and again?
Customer lifetime value (CSV) is how much loyal customers will spend with your business over their total time period as a customer. For example, if you’re a mechanic who charges an average of $500 per repair, and a customer returns for two repairs per year for the 10-year life of their car, their CSV is $10,000.
Customer lifetime value gives you an idea of how much every customer will spend, meaning you can also adjust your customer acquisition cost (CAC) or—how much you spend to get a new customer.
Other things like customer satisfaction, customer retention rate, and referrals factor in too. But overall, the higher the CSV, the more you can invest into CAC—social media, marketing efforts, or other tactics—and boost sales revenue overall.
Healthy ways to keep track of your metrics
Let’s be real—not many business owners look forward to crunching the numbers. And when you have a business to run, most of your time is spent on, well, running the business.
But just like there’s a healthy way to run a business, there’s a healthy way to look at key metrics.
The magic number is once a month. Make a point to meet with your accountant with the goal of taking a fresh look at key performance indicators and reviewing what’s going well and what isn’t.
What if the metrics don’t look right?
It happens to more small businesses than you think.
Maybe it’s the profit margins or the conversion rates—but sometimes KPIs simply don’t align with your business strategy.
If that sounds familiar, savvy business leaders know it’s time to shake things up. Maybe it’s time to huddle with your team, adjust your pricing, or partner with Bench to keep track of your books.
Regardless of the problem, checking metrics monthly makes it easy to course correct so it doesn’t impact your bottom line.
How Bench can help
Having up-to-date bookkeeping and accurate records will help you set yourself up for success when it comes to filing your return. That’s where Bench comes in. Our expert team makes sure that your finances are done right. We guarantee accurate, IRS-compliant books to help you file on time (and without the risk of penalties).
