Master the metrics of small business success
With apologies to the late, great Broadway composer Frank Loesser, you can’t succeed in business without really trying. But how do you know if you’re really succeeding in business? According to Entrepreneur, you must benchmark your business against industry competition. Metrics like net profit, liquidity and turnover ratios are some of the key measurements for business success.
Know where your small business stands
Benchmarking may seem labor-intensive, but the truth is that there are sources for all the data a small business owner needs to tell whether their business is doing well. Some of these sources are relatively inexpensive, according to Entrepreneur. Here are three key ways a small business owner can find benchmarking data:
1. Get to know business owners and associations. If you reach out to owners of businesses that are similar to yours – but outside your market area, so that competition isn’t an issue – you may be able to share financial data. Similarly, joining industry groups that conduct anonymous financial polls can give you a general idea of how your industry is faring.
2. Find industry directories. Revenue and growth figures are broken down by sector in directories like Chain Store Guide.
3. Pay for market research. Costs here can run from inexpensive to highly expensive, depending upon the scope of the study and industry concerned. Sometimes you may be able to glean some free stats from a press release about a study. Companies like Sageworks can provide you with accurate data.
What a good market study should include
According to Sageworks, accurate, up-to-date, relevant reports give business owners the best deal for their money. The most current information helps business owners understand what they must do now, and data gleaned via a focused view of a specific business field provides the most applicable solutions to overcoming barriers to business success.
Sageworks CEO Brian Hamilton suggests business owners pay close attention to these financial metrics in a market study:
Net profit before taxes margin
This is before-tax net profit divided by sales for a given period of time. In basic terms, it’s how many cents in profit a business earns from each dollar of revenue. Obviously, the higher the better.
Two ratios are important here: current ratio and quick ratio. The former is assets divided by liabilities, and it is a good, long-term metric. The latter is cash plus accounts receivable, divided by liabilities. This is more of a short-term gauge.
Turnover ratios measures how well a business manages and moves its inventory in terms of liquidity. The three most significant turnover ratios for business owners are accounts receivable turnover, accounts payable days and inventory days ratio. Accounts receivable turnover measures the number of days that a company takes to turn receivables into cash. Accounts payable days ratios measure the number of days it takes companies to pay vendors. Finally, inventory days ratios account for how many days it takes to sell inventory. For more info on calculating these ratios, visit Sageworks’ website and About.com Business Finance.