Having the ability to evaluate your business's performance in an objective manner has to be one of the highest priority items for every business owner. Unless you take the time to look at your performance metrics as a whole, it can be challenging to gauge the effectiveness of your decisions.
The reason behind this is, as a business owner, your attention spreads across different areas.
Remaining objective is challenging since one area’s success or failure often has multiple degrees of impact on your business. For instance, choosing the right financing or credit cards all the way to when, who, and how to hire.
Which metrics allow focus to the best areas of your business?
Here are three performance areas that can help give you a reliable indication of how your business is performing.
Operational Financial Metrics
Cash is often referred to as the lifeblood of a business. But in reality, “cash” is parsed by operational and performance metrics such as profit, cash flow, and the balances of your accounts. Tracking the correct indicators is a great place to gauge the health of your business.
Let’s cover each, in a bit more detail.
Gross profit is a great window into the profitability of your business. And being able to have insight into the profitability of your business is a great way to evaluate the effectiveness of your decisions. Because every decision that affects profitability should be taken into consideration for next year’s strategic planning sessions.
Gross profit, when not what you expected, prompts a deep dive into the “why” of missed (or exceeded) projections. Maybe you unexpectedly acquire a new client, lose one, a difference in the cost of goods, the list goes on.
Cash on hand
This is a great way to gauge how well you’ve been able to manage your costs. Also, it's a great measure of what resources you have readily available at any given time. It's important to make the distinction that, even though you may have a large amount of assets, you can still get into trouble if you don’t have access to them in a timely manner.
It's for this reason that cash on hand is critical to keep on track. Think of your cash on hand as what lets your business sleep at night, knowing that everything will be okay in case of emergency.
This is probably one of the most important metrics you should keep track of. Knowing how your cash flow fluctuates throughout the year is vital to you making the best decisions. Since this metric keeps track of how much cash goes in and out, it can give you a clear snapshot of the direction in which your business is trending.
Here are three reasons highlighting the importance of cash flow:
- It lets you know where you are spending your money
- It shows how big of an impact an increase or decrease will have on your overall finances
- And it helps you time your decisions better
Burn rate and runway
Burn rate and runway are the most reliable indicators of how much time you have left to either start bringing in revenue or to secure more funding. And being able to see how your runway is impacted by the decisions you make across all the areas of your business can be immensely useful. As all the other metrics in this article, you can use your burn rate to make sure that every strategy you decide to implement can have the right timing. Here are three ways in which you can use your burn rate to evaluate your performance.
- It's a great way to know if you are on track with your goals
- If you experience a big decrease in your runway, you can shift your attention to action items that will impact that area
- It's a great indicator of how you executed your budget during this past year
Identify Your BestandWorst Channels
Since many businesses have multiple streams of income, it only makes sense to know which ones are performing the best. For example, an ecommerce store can sell their products across multiple platforms, such as its own website, Amazon, distributors, etc.
Here are three reasons why identifying your best and worst-performing channels are critical to your yearly performance review.
- It gives you clear insight into how your operations are impacting the profitability of each channel. For example, if your customer service team implemented a new action plan, you would be able to trace its impact back to the performance of each channel. And after seeing the data, you can decide whether or not to implement the same or an adapted strategy to your other sales channels.
- You can decide where you need to direct your focus. For example, you could decide to build up poor performing channels or shut them down entirely. Since you know the impact they make, it allows you to make more effective decisions.
- It is a great measure of the impact that your marketing has had across the board. After evaluating each channel you can decide if you want to shift your marketing strategy to a more focused or broader approach.
Use the Right Tools for the Job
Accounting technology has made the annual planning, and feedback loop much more powerful for businesses.
One of the biggest challenges, especially for smaller businesses, is that to have an effective yearly business performance evaluation, you have to spend the resources to collect and organize all the data. The time and cost of doing this may often be prohibitive, since you may not have the resources available or even budgeted.
It's for this reason that financial dashboarding tools can make the entire process of collecting and presenting actionable data significantly more accessible. Dashboarding tools are capable of linking with your accounting software in order to automate most of the data collection and can generate dashboards with just a few clicks.
Here are some of the data that your dashboarding tool can connect with:
- Bank accounts
- All sales channels
- Credit cards and other debts
If you want to simplify and make sure that all your finances are in order for this year’s performance review?Click here for a free trial of Bookkeeper360 and get a clear picture of your own metrics.