Just as your physician assesses your overall health by measuring your pulse, blood pressure, body temperature, breathing rhythm and blood sugar; there are 5 metrics in any business, disregard to the nature of business or product, that indicate the overall health of business.
And the good news is that you don’t need to be finance wizard to calculate these numbers. So you can self assess your business after reading this blog.
Monthly Revenue Income vs Operational Expense
Plot a trend lines of both the figures across months. If you witness ups and downs in revenue trend, while operational expenses trend stays steady across months then you are incurring the same cost to generate highest as well as lowest revenue. In simple words, you are paying for an inefficient operational arrangement.
Payment Receivables (Debtors) vs Net Profit
First one is your balance sheet figure while the second is a profit and loss figure. What percentage is the payment receivables value against your net profit. For eg, if you are yet to receive 050 while your net profit is 100, this indicates that you have not collected 50% of your earned profits! The higher the percentage value the greater your financial exposure and loss risk from payment defaults.
Month-on-Month Stock on Hand to Revenue
Since finances get blocked in stock, it is very crucial to optimise stock levels. Monthly ratios of the value of stock (inventory) available to revenue – will give you a set of twelve numbers. If the Standard Deviation of this data set is too high (very far off from the average) then you are blocking way too much money in stock to generate way too less sales. In practical words, during certain months you may be struggling to pay operational expenses but have more than necessary counts of slow moving products in your stock!
Year-on-year Outstanding Debt vs Interest
Everyone including the Fortune 500 companies need to borrow money for business. And another lesser-known fact is that the borrowing is perennial! Hence the interest cost against outstanding debt, representative of borrowing costs, becomes crucial. Disregard the increase or decrease in outstanding debt, the cost of debt should reduce. If not, then liquidity borrowings are unforeseen and hence unplanned.
Year-on-year Net Profit Percentages
As business revenue increases in absolute value so does the net profit. But as Business is a game of percentages, it is the percentage value that actually matters. If your business is growing in absolute numbers but your net profit percentage stays the same across years, it simply means that you are working in the same manner as despite increase in volume you have failed to reduce associated costs.
Although a detailed assessment is required for these five indicators along with more indicators particular to the type of your business and nature of product, these are enough to improve your current level of understanding.