Business – by the numbers!

Posted: July 21, 2013 in Up-and-running Business

Yes, business is a numbers game. All small business owners want to see a basic set of numbers – the bottom line. Unfortunately, the bottom line is never what they expect. Why? There are a number of reasons for this and numbers they should track each month:

  1. The gross profit margin (gpm). This is the quotient when gross profit (in dollars) is divided into revenue. The gpm is not a useful number unless it is compared to a prior year metric. All financial software packages have comparative reports. Have your accountant prepare this. A very small decline in gpm can have a massively negative impact on the bottom line.
  2. The net profit margin (npm). This is net profit in dollars (revenue less all expenses) divided into revenue. Hopefully there is a net profit? The net profit margin should be large enough to improve the retained earnings on the balance sheet and improve the business capitalization.
  3. Client count. Believe it or not, most small business owners only think about the number of clients that have been added to the roster – not the  ones who have left. Client count should be on a “net” basis. If your business has 35 clients, how does this compare to the same period last year?
  4. Extraordinary items. These items are usually factored out of any “normalized earnings” calculations. You should track these. Bad debt expense is one that needs to be analyzed. If a client goes bankrupt or you take this client to collections, you need to re-think your credit granting policies or setting limits on how much additional credit you grant.

These are four very basic metrics that need management attention and oversight. The next post will deal with metrics that accountants should provide.






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