… and hello to four metrics that matter!
Don’t forget to grab the worksheet at the end of the post!
The new year is well under way, and there’s lots of talk
about business planning and implementation for this year (and beyond!). Before
you finalize all those amazing plans for the year, I encourage you to take a
few moments to review results from the previous year. By now, you should have those
financials available. Now is the perfect time to run a few calculations, gauge
your progress, and make any necessary course corrections.
But first, let’s talk about “vanity metrics”. Have you heard
this term? Vanity metrics are numbers
you track or report that look good to others … but have little bearing on your
overall financial health.
One good example is total revenue. If you tell me you
reached $2 million in revenue this year, I’d say “congratulations”. Because I know
that total revenue is a small piece of your overall financial picture, I would
be asking myself how much it cost you to make that $2 million.
If you had $1.9 million in expenses to make $2 million would you still be excited about that total revenue number? That would depend on your industry, and what is standard in profit, but the answer is: probably not.
Total revenue numbers do not help you measure how sustainable your business model is.
INTRODUCING METRICS THAT MATTER
If you want to feel CONFIDENT about the health of your business, track numbers that better reflect its financial health. Here are four critical metrics I track with my clients:
Revenue – Expenses = Profit
This number is found at the bottom of your
Profit & Loss Statement (it is also called “Net Income”).
Because it includes all the expenses your
business incurred to generate revenue, it’s a far more important figure than
revenue alone. Far too many businesses have large revenue numbers, and negative
Compare your profit numbers for the previous 2-5 years to get an accurate understanding of overall growth and profitability. Positive profit (and growth in profit over time) indicates a healthy and sustainable business model.
2. Net Assets
Total Assets – Total Liabilities = Net Assets
You’ll find total assets and total
liabilities on your business’ balance sheet. It’s important to calculate net
assets; if you looked solely at assets or solely at liabilities, it could be very
For example, if your business takes out a
loan, you receive cash in your bank account. As a result, cash goes up. If you
tracked total cash by itself (a seemingly logical metric to track), you would
be excited to see your cash balance increase dramatically. However, you would
be missing the corresponding liability account which would net to $0 if you
were looking at the same picture in the Net Assets calculation.
Over time, the goal is to see net
assets increase, as this would indicate the business is producing cash in the
3. Owner’s Compensation
Owner Salary + Dividends or Draws = Total Owner Compensation
Owner’s compensation is a key piece
to the financial puzzle for small businesses. Most business owners I work with
are not paying themselves enough. And most would like to increase their
I am a big proponent of making your
small business work for you, and I believe that owners should be paid well for
the work they do. If your business is not producing enough income to pay you a
reasonable salary either the business model, the pricing, or other expenses need
to be reviewed and changed. Often, it’s a combination of all three!
4. Retained Earnings
Profit – Owner’s Draw = Retained Earnings
Retained earnings is the amount of profit
that remains in the business after owner’s draws are taken.
This figure shows up in the equity section of
your balance sheet at the end of the fiscal year. If negative, you had a loss
in your business (and the business is actually sucking resources from
shareholders, the owners, or other business resources). A retained earnings number that is positive –
especially one that is continually positive and growing – indicates a business
on positive trajectory.
READY TO START TRACKING?
To help you measure these metrics, I have created a custom spreadsheet to track your metrics that matter and help you assess the financial progress of your business. I encourage you to take just a couple of minutes to plug in the data. The resulting information could be critical to your business!
Disclaimer: This blog and the linked videos are intended for educational purposes and should not be taken as legal or tax advice. You should consult with your financial professionals about your unique financial situation before acting on anything discussed in these videos. Clara CFO Group, LLC is providing educational content to help small business owners become more aware of certain issues and topics, but we cannot give blanket advice to a broad audience.