The health and success of your business go beyond what’s in your bank account and ledger. While having a healthy cash flow indicates stability, you can demonstrate excellent growth potential and robust business performance by going beyond simply reporting the numbers. Here’s an overview of 13 financial metrics and procedures that can help your stakeholders better understand your business’ short- and long-term potential.
1. Distribute your revenue evenly.
Your revenue should be distributed among multiple services or products, not just one. Demonstrating a successful spread – revenue not overly concentrated in one offering – shows that your revenue and business are healthy and sustainable. This, in turn, will boost confidence in your ability to stand the test of time or withstand shifts in consumer habits.
Having a product or service feedback loop in place also demonstrates great potential for your business. Are you staying on top of the changing tides of consumer preference and shopping habits? Are you addressing areas where customers feel your business is weak or wanting? Whether it’s a qualitative customer survey or analysis of frequent customer searches or complaints, you should establish a feedback loop. If you compare the proportion of revenue driven by your customers’ preferences, you’ll be able to make smarter decisions about cutting or adding product offerings.
2. Create an addressable market and key differentiators.
An active sector and the size of your addressable market will show your business has significant growth potential. Total addressable market (TAM) can be comprised of local, national or global markets, or a combination of all three. You can calculate market size by measuring existing revenues of legacy players. Many third-party research publications use this exact methodology for establishing TAM. Newer markets can determine TAM via top-down or bottom-up analysis.
Establishing a large TAM is great, but demonstrating clear key differentiators for your company will ensure you’re successful in standing out against the competition. Communicate your unique selling proposition to your stakeholders, and anchor your marketing and business strategy to them.
3. Establish effective cash flow processes and procedures.
A healthy cash flow is excellent, but what you really want is a defined set of processes and procedures in place for monitoring the health, projecting cash flow and correcting any imbalances. Do you have a communication plan for late payers? Do you have a standing relationship with a bank or loan organization for any sudden capital needs? Be sure to document your financial processes and procedures in a knowledge base, and communicate them to your employees so cash flow issues are handled appropriately when they arise.
4. Compare AR metrics: DSO and ADD.
Many businesses are aware of Days Sales Outstanding (DSO), but it’s important to also calculate Average Days Delinquent (ADD) to provide improved insight into your overall AR health. ADD’s formula is Days Sales Outstanding minus Best Possible Days Sales Outstanding.
New sales can impact ADD calculations. An increase in sales will lower ADD, even if overdue AR stays the same and vice versa. DSO accounts for on-time payments received and overdue AR. A healthy DSO is ideally within 10-15 days of your net terms. ADD helps your stakeholders understand how delinquent late payers are on average. Showing improvement in overtime will demonstrate the effectiveness of your payment enforcement policies.
5. Measure customer value.
How many of your customers are high lifetime-value or regular customers? How often are you converting a first-time customer to a regular customer? A business that has a steady flow of new customers and a demonstrated ability to regularly convert first-timers to repeaters is a healthy business with long-term potential. A customer retention rate above industry average is a “must-have” for stakeholders; you’ll want to shoot for 90 percent or higher.
6. Monitor your revenue growth.
Revenue growth also has a consistent definition that has been determined and agreed upon according to generally accepted accounting principles for each company given its business model. It’s the only top-line growth metric that is reviewed and certified by independent accountants.
A top-tier revenue growth rate is 30 percent or above, for at least two years, in a large addressable market. Work with an accountant to understand what growth rate is desirable for your industry and addressable market.
7. Review your cash flow ratio: operating cash flow/net sales.
This ratio is expressed as a percentage of a company’s net operating cash flow to its net sales, or revenue, from the income statement. It informs key stakeholders how many dollars of cash your business gets for every dollar of sales. Your sales should grow in parallel with your operating cash flow. Stakeholders will be pleased to see either consistent ratios or growing ratios, year over year. There is no exact percentage to look for, but a higher percentage is better. Since industry ratios vary widely, work with an accountant to determine what an ideal ratio is for your business.
8. Analyze hiring trends.
Does your business have a point of view on hiring trends for your market or business? What is your average turnover rate, and how long do employees typically remain in certain positions before wanting to move to the next level? Predicting hiring needs will make your HR processes more efficient, while a low turnover rate sheds favorable light on your business. Employees provide increasing value as they gain more experience in their role, and as an expert in your business and within your industry.
Your business should also know how many employees are needed for certain volumes of output. When you grow your business, this analysis will ensure you hire efficiently and impress stakeholders.
9. Manage incremental financial expenditures.
All software, sales, or business tools and regularly occurring payments, should not only be accounted for, but also be readily available in one view that allows you to assess your need for, or package size, of each. Don’t lose money to overly premium packages or subscription services you forgot you had! As your business grows, renegotiate terms and pricing. A set plan of action for doing this is a signal to stakeholders that you are firmly in control of your business’ incremental operating expenses.
10. Show your unit economics.
Go deeper than your AP and AR, and provide stakeholders with stats on unit economics. Unit economics help isolate “core” costs of your business from the overall costs, such as marketing and R&D; as a result, this a good way to understand or prove long-term margins. Unit economics also enable you to demonstrate how profitable your business model is, especially at scale.
11. Create a plan for growing seamlessly.
Inventory management, or work material processing, allows for more growth at a faster pace. Scale successfully and scale with confidence. Whether your business is increasing monthly order volume or expanding to new selling channels, such as social, e-commerce and/or e-tailers, it’s imperative that you do not oversell inventory. Stakeholders will also want to see that you have the appropriate processes in place for not just replacing your sold inventory, but also buying additional inventory to keep pace with your growing order volume.
12. Streamline processes for a more efficient business.
How fast do you close your books? Software that enables your business to streamline, or automate, invoicing and bill collection will improve business operations, such as turnaround time, cash flow and time to close. A shorter time to close means you’ll be able to provide more information to stakeholders on how much capital you have available to pursue strategic initiatives or to fund growth. You should understand and address dependencies that drive successful close processes. Automated processes also minimize accounting errors or redundancies, and can also aid compliance efforts.
13. Maintain accurate forecasting.
Is your business’ forecasting reliable? Stakeholders will like to see that your sales and revenue growth is predictable, and your forecast was accurate. Accurate forecasting signals that your market is strong, your business is organized and you have a strong grasp on the analytics of your business’ performance. Not having a firm grasp on your company’s performance data and cyclical trends raises serious red flags.
After reviewing this list, how many of the 13 items are you currently doing, and what will it take to get to as many as possible without disruptiong your business? Be methodical in your approach and don’t try to tackle everything at once. Slow and steady wins the race.