As an accountant and owner of Nth Degree CPAs, I often startle my clients by suggesting they shouldn't just pay attention to the bottom line. When it comes to a company's finances, most companies make measuring profits job one. And two. And three. But if you want your company to be truly financially stable, there's a lot more you should be measuring. While the bottom line matters a lot, the lines in between need your attention too.
It's easy to slip into all-or-nothing thinking — and when it comes to measuring performance, you just can't do that.
Depending on your company, structure, products and services, there's an endless array of possibilities for what you can measure. But let's start with a few ideas you may not have thought about that play important roles in predicting your overall financial health.
Sure, total sales are a great indicator of performance. Only a bad business would ignore sales data. But dig a bit deeper, and ask yourself: Who are the customers? Are they repeat buyers? Friends of customers? Making sure you measure and have a clear sense of customer loyalty and lifespan as well as how many new customers you're attracting versus how many current customers you're losing will go a long way toward predicting your current ratio — or, whether or not you'll be able to pay the bills in the future.
It may seem a bit obvious, but your company's solvency is pretty dang important. So, while your head is down, focused on the day-to-day, be sure to come up for air now and then to check in on your debt-to-equity ratio. For long-term stability, you'll need to see trend lines of equity outpacing debt — and, even better, debt heading downhill while equity heads up.
Are you spending a bigger percentage of your budget on marketing than you did last year? Are you using less of your facilities budget than you planned for? Are corporate travel costs getting out of control?
Making clear, marked baselines and closely following your investments and where you're spending your money all year long rather than just at the annual budgeting meetings can save your company money, and also help you use your money better.
Pay Attention to the Forest
The ideas I've offered here are just some of the things that may contribute to a company's financial certainty. For your specific business, dig in and find the most appropriate things to monitor. But at the very least, don't lose sight of the forest by looking only at the trees. For example, if you run a service-based business, the only financial metrics that really move the needle are realization, utilization and revenue to compensation. If you focus too closely on any one of those, you may lose sight of rest of your business. And that's never good for your bottom line.
For more insights by Dan Nicholson, check out his contributor page.
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