The 3 business metrics you must know

Posted: April 30, 2013 in Business Financial Statements, Up-and-running Business
Tags:

Financial statements can provide too little or even too much information for a business owner. The 3 metrics you must know are:

  1. What is your business breakeven point in revenue? Most business owners chase revenue in the hope that the next dollar of revenue will be the dollar that results in either a breakeven point for the company or a profit. If a business owner understands their breakeven point they also understand their “contribution rate” and fixed cost structure as well. This is not easy for many business owners to understand however. Most business owners mistakenly believe that more revenue will result in more profit. Leading to metric #2…
  2. What is your gross profit margin? This is the quotient when you divide gross (dollar) profit into revenue. This is a key metric to understand because revenue growth without maintaining gross profit margins will result in larger problems. I’ve worked in companies where sales increased nicely but gross margins declined. Profits were squeezed to nil and when revenue declined, the business ended up in a world of trouble. This leads to metric #3…
  3. What is your fixed cash burn rate? This is the total of the monthly fixed cash expenditures that the business must disperse without the luxury of $1 of cash inflow to cover. Fixed cash disbursements include: rent, leases, equipment rentals, payroll, banking costs, bank term loans, phone bills, internet and network costs, monthly insurance payments – there could be more. The important point about the fixed cash burn rate is that this metric is the acid test for your business model.  Your business may generate a small profit or even be breaking even but, unless you understand how much cash you need to cover your fixed cash costs you are lost.

 

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s