Measuring success: Key Performance Indicators to watch
Watch the Webinar: 5 Steps to a Profitable Business (above)
No matter why you went into business, determining your company’s success comes down to one thing: money.
Measuring financial success relies on Key Performance Indicators (KPIs), which give you the right information to allow you to feel more confident in your business decisions. For example, how do you determine pricing? Can you afford to hire new employees? Can you offer employee benefits?
So, the big question is: Are you making enough money? Here are four KPIs you should be watching to find out.
1. Gross profit trailing twelve months
At any given time, trailing twelve months (TTM) is the time period of the past 12 months. Every data point represents the 12-month total for that date. It provides a holistic view of the past year rather than a month-by-month calculation.
For example, if you’re analyzing the gross profit TTM for your company for August 31, you would see an amount that represents your gross profit from September 1 of last year through August 31 of this year.
Gross profit is revenue minus the cost of goods or services sold. The cost is composed of two things: direct labor and direct materials. Direct labor is the labor cost to provide your service. Direct materials are the non-employee costs for a job. For example, this could include things like traveling expenses, mileage reimbursement and subcontractors.
Gross profit tells you whether you’re making your targets, and the profitability of your goods or services. It should be a key factor in your pricing.
2. Net income trailing twelve months
Net income, the most important measure of your profitability, is the remainder after overhead expenses are deducted from gross profit.
If you look at your data per month (rather than TTM), you end up living month-to-month – getting overly enthusiastic in good times and terribly disappointed in bad times. A TTM report will give you a real look at the economics of your business.
This isn’t to say that you shouldn’t watch your net income month-by-month, but getting the larger picture can put things in perspective.
3. Realization rate
It’s amazing that so many business owners overlook this one. Realization rate is the total revenue divided by total employee hours worked. It will give you an idea of how well you are at pricing, staffing and managing your people. It illustrates how effective you are with each job.
This is especially useful when determining which projects or clients are worth it to your business. For example, your employees spend a lot of hours on a project or client that earns little revenue, consider putting their time to better use.
Your realization rate will tell you where your resources go and how much return on investment you get.
4. Cash flow
Cash flow problems are one of the most common reasons companies go out of business. Without it under control, you can’t grow your business. You’re always operating in panic mode.
Are you collecting on money owed to you in a timely manner and do you have the money to cover your debts? If you need help in this area, read “How to Improve Your Cash Flow with Better Bill Collection.” If you don’t have a cash-flow problem, then it’s time to focus on your cash-flow forecast. This should give you a six-week look at where your money is coming from and where it is going. A six-week forecast gives you time to make a strategic plan if you anticipate a period when your receivables won’t cover your payables.