SBA 7(a) loans up to $250,000 and ERC up to $26,000 per employee available in the Portal — Log In or Sign Up.
Business owners are busy and donβt have endless time to spend analyzing their financial data. Despite this fact, it is absolutely worth investing time to understand how your business is performing and quickly spot any issues.
Even the busiest owners can find a few minutes each month to track these four key metrics, which we will review in this article:
1. Gross margin
2. Customer concentration
3. Accounts receivable aging
4. Cash needs
Key metrics to make better decisions for your small business
Each business and industry is unique, so the most important metrics may vary β but these four are critical for most companies, especially for B2B companies but also for some B2C teams.
1. Gross margin
What it is: Gross margin is the amount of money a company retains after incurring the direct costs associated with producing the goods and services the company provides.
By tracking your gross margin on individual products or services, you can figure out where to focus your attention. If one product has a gross margin of 50% and another is just 5%, you might consider allocating more of your time and resources to the higher margin product.
(πππ£πππ’π β πππ π‘ ππ πππππ π πππ)/πππ£πππ’π Γ 100
If a product is sold for $100 that cost you $40 to make, that results in a net of $60. Divide that by product revenue ($100) and with the result is a gross margin of 60%.
2. Customer concentration
Customer concentration is amount of revenue generated from your customer(s).
If your top customer stopped buying from you, would your business go under? Thatβs what customer concentration can help measure. Ideally, revenue is spread across a variety of customers to decrease risk if one customer leaves.
How much risk and customer concentration youβre comfortable with is up to you and your team to decide, but tracking this metric can help you maximize the impact of diversification and new customer acquisition.
ππππ’ππ‘ ππ πππ£πππ’π ππππ π‘ππ ππ’π π‘ππππ(π )/π‘ππ‘ππ πππ£πππ’πΓ100
If you earned $90,000 from your top customer last year and your total revenue was $200,000, customer concentration is 45%.
3. Aging of accounts receivable
Aging of accounts receivable is a list of current unpaid invoice balances and how long theyβve been outstanding.
This metric can be used to discern a companyβs ability to recover credit sales during a specific accounting period. Tracking this can help identify customers who have a history of payment issues.
For example, if your aging of accounts receivable report shows that a customer has been slow to pay, maybe they are having financial problems. If thatβs the case, you should more closely monitor their payment status for each invoice and pursue the receivables more frequently if necessary.
ππ£πππππ πππππ’ππ‘π ππππππ£ππππ π₯ 360 πππ¦/π ππππππ‘ π ππππ
Aging of accounts receivable = average accounts receivable x 360 days / credit sales
If you have average accounts receivable of $450,000 from customer A and the total goods you sold to them on credit was $900,000, the accounts receivable aging would be 180 days [($450,000 x 360 days) / $900,000].
4. Cash needs
Cash needs are all of the expenses or reimbursements considered in, or required by, a companyβs business plan, including funds to cover payment of taxes, assessments, utilities, insurance, and other operating expenses.
Running out of cash is the number one reason why new businesses fail. Itβs crucial to ensure your business always has enough cash to cover expenses and keep operating in case of an emergency or changes in the economy.
Thereβs no one-size-fits-all amount for your cash balance to monthly expenses ratio, but the general recommendation is to have enough cash to cover at least three months of expenses. If you donβt have that, you might consider setting up a line of credit or loan that can be relied on if needed.
Cash needs = typical monthly operating expenses as compared to balance of cash in your bank account
Add up your typical monthly operating expenses. If you arenβt sure, total all expenses over a certain period (3, 6, 12 months etc.) and then divide by the number of months to get the average. Then look at how much cash you have in the bank to see how many months you could cover if needed.
If typical monthly operating expenses are $4,000 and you currently have $10,000 in the bank, you should be able to cover two and a half months of expenses, even if revenue declines or customers do not pay on time.
Donβt just calculate these metrics each month and forget about it until the next time β track any long-term changes or trends that might provide valuable insights to make better decisions for your business. For example, if your gross margins are declining over time, it could mean you have increasing costs, decreasing sales, or both. Keep an eye on it and look for strategies to improve each metric.