Top 3 Metrics to Track Profitability
With the 4th quarter around the corner, now is a critical time to assess and project profitability metrics for 2015. There is still time to make changes to impact your bottom line for 2015 that will carry into next year. Entrepreneurs gravitate to measuring growth, increasing revenues, or focusing on daily operations when assessing current and projected financial information provides vital information to increase corporate value.
I have met many that say “This year, I am trying to grow the company 40% and then next year I will focus on profitability”. The truth is that both need to be assessed, and a sound financial strategy put in place, to ensure the viability of the company and maximize its value in the long term. While there are many metrics that should be monitored to understand the health of your business, every CEO should keep a close eye on these top three.
Gross margin is an important metric to understanding profitability. Gross margin helps identify variances in production costs or inefficiencies in managing labor costs. Reviewing this metric over several intervals will identify where inefficiencies occur or where costs can be lowered and/or renegotiated with suppliers. The gross margin is also impacted by sales price and validates when changes are necessary.
Another important measure is net profit margin, which illustrates the portion of profit generated from each sale. This is likely the most vital data point in understanding profitability. This metric reveals efficiencies, economies of scale, as well whether or not your overhead expenses are in line with your performance.
Most business owners are very aware of their current cash balance; however, they typically do not understand the dynamics of their cash flow. Part of your statement of cash flow, the cash flow from operations line, describes the cash being generated by the business operations, over a defined period of time. While a company may show a positive trend with net profit margin, a negative trend in accounts receivables or lack of management of accounts payable, can easily alter the cash flow of a company. So many times, an owner says “My income statement shows that I am making money but I don’t understand why the cash isn’t there”. Since cash flow problems are most typically the culprit of failing companies, you can see why this metric made the list of those most important to track.
At CFO Strategic Partners, we are prudent in our efforts to increase our client’s bottom line and increase shareholder value. Our CFO’s are the country’s top talent, from diverse backgrounds including data analytics, risk-management, and business process reengineering.