Running a small business can be challenging in a variety of ways. When you're focused on taking care of customers and strengthening employee morale, it's easy to get behind on the key financial metrics that make it all possible.
Here are 3 important financial benchmarks to pay attention to, so you can ensure a healthy and profitable business:
1. Cash Flow
Your cash flow is essentially the money that comes into your business minus what goes out. Positive cash flow means you have more money coming in than going out, and negative cash flow means that your outgoing cash exceeds what your business is bringing in. Ideally, you want healthy cash flow for your business, meaning you’re comfortably in the positive range, instead of being just one event away from going negative. Having healthy cashflow is a strong sign you're running a sustainable business that's poised for growth.
Effective cash management strategies are critical to maintaining positive cash flow. Without enough cash on hand, your business may have trouble paying the bills, buying inventory, or covering payroll. These scenarios could cause your business to go into debt, and as debt grows, the cost of borrowing can reduce your cash flow even further.
Here are some tips for maintaining positive cash flow:
- Keep a cash flow statement and update it regularly. A cash flow statement helps you see exactly how much cash you have coming into the business and where it’s coming from. It also breaks down how much cash you’re spending. If you don’t yet have a cash flow statement for your business, you can download a template to get started.
- Estimate future cash flow. A cash flow projection, or cash flow forecast, can help to prepare your business for slow periods or unexpected costs. By getting ahead of anticipated dips and swells, you can help to minimize future stress and cash strain.
- Keep a close eye on your spending. Look for opportunities to cut back on costs to improve your cash flow. Identify areas of waste such as unsold inventory, unused office supplies, inefficient business processes, ineffective marketing campaigns, and unnecessary subscriptions or services.
- Address outstanding customer invoices. Understand the amount of unpaid invoices you’re owed, and find a way to address them. This could involve changing internal processes to invoice clients and customers sooner, sending reminders for outstanding invoices, and incentivizing customers to pay early.
2. Customer Acquisition Cost
Your customer acquisition cost is the average amount of money your business spends to gain a new customer. To calculate this metric, you’ll add up all of the sales and marketing costs you’ve had over a given period and divide that amount by the total number of new customers you acquired within that same timeframe. By knowing your customer acquisition cost, and keeping track of it over time, you can work to improve it. Cut back on marketing and sales initiatives that aren’t working and devote more budget to your most successful customer acquisition channels. The lower you can get your customer acquisition cost, the better off your business will be.
3. Profit Margin
Profit margin is a measurement of how profitable your business is. It’s essentially the percentage of revenue that your business has left over after expenses are paid. While it’s important to understand your business’s overall profit margin, it’s also important to review the profit margin of specific products or services that you offer. Knowing which ones have the highest profit margin will allow you to focus more on the most profitable areas of your business.
Profit margin can be measured by looking at either gross profit or net profit, but because net profit includes your operating expenses, it’s generally considered to be a more comprehensive metric. A “good” net profit margin is generally considered to be around 10%. The higher your profit margin, the more profitable your business will be.
You can calculate your net profit margin using the following formula:
Net Profit Margin = (Total Revenue - All Expenses) / Revenue × 100
The Bottom Line
With so many financial tracking metrics out there, it can be easy for business owners to feel overwhelmed. The good news is that by focusing on the most critical benchmarks, you can help position your business for success. If you're interested in cash management or financing solutions for your business, don’t hesitate to contact BankFive today.