Every business uses “the bottom line” in determining how successful their business has become. There are two areas of focus in viewing the health of your business. The most common is using financial statements that represent past performance. Many of those numbers can be compared to industry standards to determine how well you perform compared to others in your industry. Unfortunately, that past picture often gets developed too late. Another area of focus is what we call “leading indicators” of future performance. These give you some sense of where the business is headed.
One of the most common accounting measures begins with the Current Ratio (current assets divided by current liabilities). This ratio tells you liquid you are and represents how much trouble you would have paying your bills.
Gross Profit Margin percentage (gross profit divided by sales). This measures how effective you are at buying or producing your product along with how good a job you do at pricing your product.
Operating Expense percentage (operating expenses divided by sales) shows how well you manage your operating expenses in creating sales.
Return on Investment (net profit before tax divided by equity) looks at your business as an investment. It helps you answer the question “should I invest in this company?” Sometimes the answer here makes you a bit nervous considering the risk you may be taking as the owner.
There is a trend in using “leading indicators” in determining the health of your business. The idea here is to get that picture of how healthy you will be in the future. Some of those measures include:
Employee Turnover: How many employees left your business last year? A high number or percentage here means the greater your hiring and training expenses. It also may lead to higher customer turnover due to reduction in customer service caused by new employees.
Customer Retention helps you track whether you are losing or gaining customers over time.
Complaint Percentage (number of complaints or reworks divided by number of orders) is indicative how happy your customers are. Another measure of customer satisfaction would be How Likely to Recommend. As this percentage drops over time you will find more and more of your present customers going elsewhere.
Back Order Percentage (number of back orders divided by total orders) measures how efficient you are at filling orders. It also is indicative of customer satisfaction and future sales trends.
Many sales oriented companies measure contacts per month, proposals per month and orders per month. By combining these numbers you get a sense of how successful your are in front of the customer.
Proposals per contact (total proposals divided by total contacts) show how effective you are at being able to generate enough interest from your client to give them a proposal.
Orders per proposal (total orders divided by total proposals) shows how effective you are at closing sales.
Orders per contact (total orders divided by total contacts) measures how many clients you must meet to be able to generate an actual order.
Many of the best information in the above numbers comes from keeping the information over time. It is the trend of showing how happy customers are and how well you build relationships with your customers that helps you predict the future success (or failure) of your business.
If you would like to get a better understanding of how healthy is your business, please contact Jim Kress at Central Oregon Community College 383-7712.
If you’d like further information, call COCC at (541) 383-7734.