Many small business owners, especially in their companies’ early stages, are experts on the product or service they provide, not the financial numbers. Even experienced business owners may find themselves so busy making sure everything gets done that they rarely have time to sit down and dig into the numbers.
We want leaders like you to understand the financial numbers in your business so you can make better decisions and improve the health of your finances.
In this episode of One Next Step, I'll share the top three financial metrics that matter most in your business and how to use them to lead your business.
Here are some of the main points from the episode:
1. You can’t manage what you don’t measure.
Finances are often a source of misery when they remain a mystery. Knowing and understanding how your revenue is coming in is important. You must start tracking the three essential financial metrics — revenue, cost of goods, and net profit.
Note how many services you have to learn which are performing well. I recommend tracking these weekly by percentage to know which products are the largest percent of your revenue and which are subproducts.
Your industry and what you’re selling will determine how you budget and track your revenue. If you have an installment-based business, it’s even more important to track and plan ahead.
These numbers give you the information needed to decide what you sell, how much you sell it for, and what you pay to produce it. Empower yourself to be the best leader you can be by tracking the numbers so they’re available for reference when you need them.
2. Set the line.
Decide to run a profitable business. Leverage industry research and professional contacts to determine the types of margin you can make on what you sell — the percentage of revenue kept by the organization after paying for the product or service to be produced.
Then, set the portion you want as profit. The percentage left will be allocated to operating costs. After you do that, stand firm on those percentages to ensure you run a financially healthy business.
Decide to create your own benchmarks so that you can decide what the margin is that you need in between. Budgeting to determine what you need your profit to be and what your gross margin allows you to quickly and easily adjust when needed.
3. Review the numbers monthly.
Great coaches would never lead their teams well if they only checked the score at the end of the game – but that’s what many business leaders do.
Running a business and leading a team requires you to modify plans, try new tactics, acquire more talent, and more.
These types of adjustments demand you know how things are during the game, so you have an opportunity to influence the outcome. Having someone in your corner who can walk you through all of this will help you grow your organization.
We recommend you review the top three metrics at least once a month via a profit and loss statement and profit and loss forecast. Also, a weekly cash flow projection would be ideal as it would prevent you from seeing any surprises at the end of the month.