More Reasons to Monitor Your Company's Metrics
Updated: May 17, 2020
While the owners of companies in decline often readily agree that cash flow forecasts and metrics need to be monitored on a regular basis, those who have rapidly growing companies often struggle to sit still long enough to watch their numbers. They are also often baffled when they face a cash crisis even though the company sales are improving. One of my favorite Harvard Business Review articles, "A Small Business is Not a Little Big Business," helps explain what is happening. Even for an owner/operator who isn't a numbers person, an understanding of working capital is critical to running any business. Profits are not the same as cash flow, and often for a small growing business these two items move in opposite directions.
A regular review of key metrics is pivotal for correcting parts of the business that have gone awry before they lead to a cash crisis. Standard financial items, such as days sales, days payable, days inventory, fixed asset turnover, inventory turnover, gross margins per line of business, revenue per employee, and EBITDA margin should all be monitored closely by every company.
Monitoring operating metrics on a regular basis is possibly more important. They are often leading indicators of financial metrics, which are often leading indicators of a cash crisis. Operating metrics are custom to each particular business and industry. For example, if your business is affected by the weather, a "revenue per good weather day" metric can be key to understanding if the weather is the culprit behind reduced sales as opposed to an internal problem. Or, if your key sales people conduct introductory meetings with potential clients, a conversion rate (won opportunities over created opportunities) for each sales person along with mutually agreed upon goals for each should constantly be at your fingertips.