Are you looking for the most efficient way to improve your business? To know where you can improve, first, you need to understand where your business is at right now.
To get a clear idea of your company’s current status, you should examine a few key financial metrics.
Tracking certain financial metrics can help you determine your business health, which in turn allows you to make informed decisions about how to improve your business in the future.
There are many ways to break down business metrics, and each one will tell you something different about your profits and expenditures.
Regardless of how you choose to approach your finances, there are three key financial metrics that you shouldn’t ignore. Read on to learn more about them, and why each one is so important.
Gross Profit Margin
When looking at your business metrics, it’s important to use key performance indicators–also known as KPIs. A KPI measures how close you are to reaching a particular goal.
Gross profit margin is one of the most important KPIs a business can track.
Put simply, a gross profit margin is a measure of a product or company’s profitability. It measures how much your business profits off sales.
The sales price of a product doesn’t reflect the money your business earns; each sale has associated costs–after all, you have to buy or make a product before you can sell it.
Take your sales price and subtract the associated costs. That’s your gross profit. Divide that by the number of sales you make to find your gross profit margin.
Another useful KPI is inventory turnover–how often your inventory needs to be restocked over a selected period. This can tell you a lot about what products are selling.
You should shoot for high inventory turnover; low turnover means one of two things: you either have too much stock or you aren’t making sales. Neither is good for your business health.
This figure is easy to determine–simply divide your number of sales by your inventory.
Return on Investment
Return on Investment, or ROI, is an important KPI that lets you know if things like ad campaigns are paying off; it measures how profitable such campaigns are compared to the cost of running them.
While this metric is usually used for advertising, it can apply to other investments, too, such as the purchase of new equipment or property. Check out how you could invest in a new building, for example.
There are two versions of ROI calculation: ROI value and ROI rate. The former is calculated by taking the revenue attributed to the investment and subtracting the investment cost.
For ROI rate, take the ROI value and divide it by the investment cost; this will help you determine the rate at which the cost is recouped.
The Financial Metrics That Matter Most
Keeping track of the financial metrics above helps you stay informed about your company’s profitability, turnover, and investments; with all of that info at your disposal, you’ll be prepared to push your business even further.
Are you looking for more ways to increase profits or cut down on spending? Visit our finance blog for more great advice!