10 Key Metrics
Hal Geneen of ITT once said ,”The drudgery of the numbers will set you free.”
He also reminded us that, “The numbers aren’t the business; they are a picture of the business.”
True enough. And to get a reasonable comprehension of that picture, we believe you must know – even internalize – 10 Key Metrics.
Here they are.
1. Cash. Obviously, if you don’t have – or don’t know how much – cash on hand you have, any company is headed for the shoals – if not already run aground.
2. Accounts Receivable. Not only is the amount and trend of this number important. It alerts you to vulnerabilities in attitude and procedure in your organization. If the trend is rising and aging (how long an invoice remains unpaid is increasing), it may indicate a fear that collection efforts will result in losing clients. This practice is allowing your customers to abuse your cash flow and business generosity.
3. Accounts Payable. Combined with Accounts Receivable, these two together get you the ‘accumulated’ health of your business over time. If A/P is way above A/R, you’ve been living off vendor’s money. The opposite usually tells you there are collection problems and more than likely lots of bad debts.
4. Long Term Debts and Leases. Add these to the A/P amount and the picture of true book value begins materialize. This helps clarify the true monthly, quarterly, and annual ‘nut’ for staying operationally sound.
5. Headcount. How many people work in the company? And in what capacity – part time vs. full time? This will become more important because of the Affordable Care Act. And this number serves as a potent denominator for Sales. Not to mention as the ratio of personnel costs to (estimated) total overhead.
6. Payroll. There are legislative and regulatory requirements to record this continuously. And what you’re interested in deriving is the average cost per employee.
7. Investments. Here you determine the cost and/or value of equipment, buildings, land, stocks. Whatever the company owns. If there are significant investments in property, intellectual property, trading accounts, etc. you and your Executive Management want to be able to derive a number that can answer this fundamental question: Where did the money go and what did we get for it?
8. Sales. Essentially, you want to determine how much cash [yes, cash, not just revenue] each employee is bringing in. If Sales/Employee is less than Average Cost/Employee, there’s a crisis brewing. If the opposite is true, then this should be reflected in the ratios you calculated using 2, 3, 4 and 7 to verify that you are making money – and using it properly.
9. Cost of Sales. Very simply, you want to add up all your direct costs of making the product or delivering the service to get a basic idea of your gross profit margin, if any.
10. Taxes. These are derived from Sales Tax Reports, Payroll Tax Reports, etc. Obviously, another legal requirement. Back taxes can really sink a business. If for any reason, a business owes prior period taxes various Federal, State, and Local agencies, this is a clue about shoddy record keeping and poor cash management which caused the business to borrow from Uncle Sam or the State. This is one of the most expensive source of funds in the world given the penalties and interest charged by the government for underpaid taxes.
So, what are your 10 Key Metrics? Please let us know.