Review these five simple metrics to ensure your business is on track.
Your financial statements tell a story about your business. If you ever feel like your business is stuck and you don’t know how to proceed, the answer is often contained in your financial information. Bookkeepers and accountants spend so much time making sure that your financial statements are accurate because it could really mean the life and death of your business. Through reading and interpreting your finances, you are able to determine if your business is moving ahead at a good pace, or falling behind, or whether you have enough cash to pay yourself or your employees. And more importantly, your financial information often contains clues on how to deal with any negative issues that arise.
As such, it is of paramount importance that you learn how to read and interpret your financial information. How do you read the information and what should you look for?
Allow me to boil everything down to five simple numbers to look at – your financial metrics. There are five key financial metrics that you want to evaluate on a regular basis to ensure that your business is on track. These metrics are stated as a percentage of your gross revenue, and are as follows:
- Cost of Goods / Services: 50%
- Sales & Marketing: 5% to 15%
- Management: 15%
- Overhead: 10% to 20%
- Profit (before tax): 10%
Any deviation from these metrics could mean that there is a trouble area that needs to be addressed (and quickly). Let’s break each metric down:
Cost of Goods / Services should be approximately 50% of your revenue. This includes all of the direct costs that it takes to produce the goods or services that you sell. For goods, it includes raw materials, shipping and taxes, processing costs, etc. For services, it mostly includes the labor that it takes to provide your service.
Sales & Marketing should be about 5% to 15% of your revenue, depending on the life cycle of your business. If you’re new to the market or trying to create a demand that doesn’t already exist, then this percentage should be on the higher side. More seasoned companies or ones in which there is already a strong demand can go a bit lighter. Keep in mind this includes all your social media, advertising, marketing consultant fees, and sales salaries and commissions.
Management should be about 15% of your revenue. This type of management refers to your executive management. This is not the “middle” or “line” or “project” management used to supervise your direct labor and ensure they are producing at appropriate levels – that should be included in your Cost of Goods / Services metric. This is geared towards high-level management of your business – think C-Suite and Director level folks (and owners pay for small business owners that are not quite there yet). This also should include management / strategic consultants, such as your business coach.
Overhead is then 10% to 20% of your revenue. Really this percentage is dependent on how much Sales & Marketing eats up your budget. Overhead is everything left over – rent, insurance, supplies, travel, and yes accountants.
Profit is what is left over and should be about 10% (before taxes). If you are growing a nice healthy business, this is the profit level you want to aim for. Note that this measure should be made AFTER owners are paid.
Keep in mind that these are very simple benchmarks and only a detailed review by a management accountant can help you determine what your particular metrics say about your business. Just because you are off target on a metric doesn’t mean that your business is heading down the doomsday path. It just means that you need to take a moment to understand WHY you’re not hitting these metrics then determine if and what needs to be corrected. Newer businesses, for example, tend to not be exactly on track with these metrics, and that’s okay, as long as there is a plan to get on track.
And of course, if you need help to analyze and possibly correct your metrics, then we at CFO Services Group are more than happy to help you out! Please schedule a free consultation with us and let’s chat