When running a small business, it can be easy to get caught in the trap of assuming that if there is cash in the bank you are doing well and if there is no cash, you need to do better. Unfortunately, there can be much more to determining how successful you are currently and in which direction you are moving.
It is critical that you start by understanding the basics about revenue, margins, profit and cash-flow to properly manage your financials. By examining these 4 components on a regular basis you can understand where the money in your business is coming from and how your business is trending in general. Depending upon your business though, there may be other key metrics that you should be measuring to be successful. You need to determine what these are for your organization and watch them to ensure you are heading towards our goals.
For example, if you are a restaurant that provides entertainment for your patrons, it may be important to understand what percentage of revenue you should spend on entertainment and be sure to manage to that number regularly. If you develop a product, understanding your direct materials cost is critical. And if you are in a service business, knowing what your fully loaded average realized billing rate per customer might be the metric that is key to your long term success.
Numbers are important because they can tell the story of your business. If you want that story to be a long one with a happy ending, you will want to know what numbers are important for your business and watch them like a hawk.
Michael Giuffrida from Southington CT has been operating businesses since 1997. He is an experienced entrepreneur in business management, profitable growth, business valuation, mergers and acquisitions, and information technology managed services.