What makes a good metric?
Businesses can increase their opportunity for success with sustainable operating models. Sustainability doesn’t mean the same thing for every enterprise, however; each organization has to decide which metrics offer the best way to track progress.
When starting a business some choose to gauge their results based on the volume of products and services they sell, i.e units sold; others care more about the amount of dollars made through such transactions, i.e. revenue. Other companies go even further by tracking what’s left over from their revenue by subtracting taxes, payroll, supplies and other expenses, i.e. net income.
Are sales a good financial metric for your business?
Revenue tracking can serve as a great indicator of overall business growth, especially when viewed within a larger context. Sales can provide a comparable measure of market share gained by knowing the estimated sales potential in the company’s market area. Plus, one may be able to extrapolate comparative growth trends between competitors.
Invoiced sales are also a great lead indicator in predicting future cash flows based on the average number of days it takes to collect an invoice.
Is revenue a perfect measurement?
As with any metric methodology, revenue tracking has blind spots. A company that only looks at how much is being sold each day may miss the profitability of those sales. For instance, a company may be closing oodles of new sales, yet operating at an overall economic loss.
Similarly, revenue exclusive metrics that aren’t connected to collection metrics (like days in Accounts Receivable) may obscure whether invoices are being collected in a timely fashion.
Making revenue measurements more useful!
So how do companies benefit from the advantages of revenue measurements without the negative aspects? Simple! Adopt financial reporting that contrasts revenues with other economic and non-economic metrics which can reveal your marketing ROI (return on investment).
For instance, what if you track revenues categorically based on their lead generation source? Looking at whether sales leads came from social media engagement, walk-in business, advertising, etc is a great way to analyze the impact each of these verticals has on growth.
Companies can zoom in on specific revenue streams and compare it to the expenses associated with the source to determine how much “bang they got for their buck”. This added analysis can guide you in determining the best and most economical sources of leads to sales.
Bottomline: there are many ways to judge a company’s fiscal health, and it’s important to leverage the right techniques for your company. Honestly, it can be difficult to know which financial metrics are best for you and your company. However, by receiving professional guidance empowers businesses to short cut the learning curve becoming more successful in a shorter period of time.
Discover how Intigro’s CFO services and experience can increase the efficacy of your projections and your business model by getting in touch with them. Maybe a part-time CFO is just what you need, even if it’s just for a few hours, days or weeks!
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Obviously, there are no guarantees of success; however, if you do the above, your chances for success are improved.
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