CEO Advisor Newsletter April 2020
Health of Your Business:
7 Key Performance Indicators (KPIs)
Many CEOs will simply check their income statement at the end of the month to assess their company's bottom line: Net Income. However, it is important to look beyond this base measurement to ensure you are getting the full picture of your company's well-being. By understanding additional financial metrics and key performance indicators (KPIs) with management reporting, you will be better able to make better informed decisions for your business.
So how do you determine or measure the health of your business? Start by monitoring these 7 important financial metrics:
1. GROSS PROFIT MARGINA healthy business has a high Gross Profit Margin, which can be determined by dividing Gross Profit by Sales. Gross Profit Margin, also known as Gross Margin, varies by industry but it is so essential. As a small or mid-size business, improving your Gross Margin should be one of your key goals - increasing sales revenues while decreasing the costs to deliver your products and services.
2. CUSTOMER RETENTIONArguably your most important metric is Customer Retention Rate. If you don't retain your customers, your business will suffer tremendously. Customer Retention Rate should be monitored on an ongoing basis. The higher the rate, the better you are at keeping your clients happy, and your clients wanting to continue working with your company. Setting goals and tracking customer retention helps to improve your service offering while increasing sales and profits. Software-as-a-Service (Saas) companies should strive to achieve a 93% Retention Rate.
3. CUSTOMER CHURN AND REVENUE CHURNCustomer Churn and Revenue Churn are two critical KPIs that need to be tracked and are so important to sales, profits and the value of your business. The lower the rate of churn, the better. It is important to track and improve both Customer Churn and Revenue Churn.
4. CASH FLOWWhile knowing that your revenue is growing can be exciting, it's important to not forget the significance of maintaining a healthy cash flow. Your cash flow is the cash received minus the cash paid out during the time period. Cash flow measures the ability of the company to pay its bills and remain solvent both short-term and long-term. According to a U.S. Bank study, 82 percent of business failures are due to poor cash management.
5. DAYS SALES OUTSTANDINGDays Sales Outstanding (DSO) is an important financial metric to monitor. DSO measures the average age of Accounts Receivable - if your average is trending higher, then your business is more likely to struggle with cash flow. Knowing your DSO can also help determine whether or not to outsource collections or to simply improve your current processes and policies.
6. DEBT RATIOSThe debt ratio for your business is your total debt divided by your total assets and total debt divided by equity. These ratios show how "leveraged" your company is. While it's a good idea to keep your debt ratio low, you may be able to use debt wisely to help grow your business, especially in these days of extremely low interest rates and questionable economic times.
These two important types of debt ratios are also referred to as solvency ratios. These ratios help you to determine the financial risk of your business and its liabilities, and help you to understand the creditworthiness of your business and its long-term sustainability and health. You'll want to check your ratios regularly to understand your financial risk and health.
7. ASSETS TO LIABILITIES RATIOTotal Assets divided by Total Liabilities and Current Assets divided by Current Liabilities should be tracked on-going. These are important KPIs that should be focused on for the solvency of your business. A baseline goal is to have at least $2 of liquid assets to pay each $1 of liabilities.
When trying to gain a better understanding of your business, tracking KPIs will help you take the guesswork out of your financial situation. We can help you stay informed about the health of your business, and assist you in identifying and solving any challenges that may arise.
CEO Advisor, Inc. can advise and assist you in establishing KPIs to substantially increase your sales, profits and the value of your business.
Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Are you experiencing minimal growth
or declining profits?
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Don't waste another year in group coaching services or waiting for your business to turn around on its own - gain the one-to-one hands-on proven advice and work performed to meet your goals. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. today at 949-629-2520.
This is the time to be proactive and gain the help you need. CEO Advisor, Inc. has helped hundreds of CEOs, presidents and business owners achieve their goals and change their lives dramatically over the past 16 years. We have tripled our clients' sales, substantially increased their profits, raised millions of dollars of growth capital, and we have turned unsellable companies into sought out, extremely valuable companies.
Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. for a no cost initial consultation at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.