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Business Metrics: It’s All About Perspective

By March 4, 2020April 21st, 2020Information

Business Metrics for Your Company

Business metrics are important for you to pay attention to. Whether you’re a new business, or an established one, it’s important to have a way to look at the information about your business.

Business metrics can inform:

  • What you’re doing right and wrong
  • Where you may want to improve
  • Things you need to be doing to track the financial and operational health of your business

The reason that you want to look at your business metrics, is to first track your company’s health. See how you’re doing.

What things are going right? What things are going wrong? Measure your progress over time.

Then, think about how things are improving over time.

What Happens Next in Business Metrics

After you develop those metrics to see when you need to make adjustments to your plan, ask yourself:

  • Which things do you need to tweak?
  • What’s not going well?
  • What do you need to change, to figure out what you need to do to do better?

Business metrics and KPI’s help you to figure out:

  • Where things are going well
  • Where improvement’s needed
  • How you come up with your metrics, every business is different

Every business is going to have different things that they need to look at depending on the business. But, there are a few themes that are common throughout business metrics and KPI’s.

You should look at it from three different perspectives.

1. Bank or Lending Perspective

How is the banker going to be looking at your business? Odds are, most businesses are going to have to take out a loan. This is to either buy a building or to fund extra growth. Or for some reason, they’re going to want to talk to a bank and get a loan at some point.

Considering what the bank sees as important is key in developing those metrics. Now the bank is going to look at different viewpoints.

They’re going to look at what they call the five C’s of credit:

1) Character

Are you a trustworthy person? Do you have a good FICO score?

2) Capacity

Can your business afford a loan? Can you pay back this money that they’re going to loan you?

3) Capital

What have you, as the owner, invested in that business?

If you haven’t invested much in the business, the bank is not going to be willing to invest a lot along with you. This is because a bank doesn’t want to lose money. So you want to make sure that you’re looking at it from the bank’s perspective, the conditions.

4) Conditions

What are the conditions of your business? The economic environment?

Are you in an industry that’s on the upswing? Does that have a lot of business potential for the future? They’re going to look at the conditions for your business.

5) Collateral

What do you have to help the bank, and be willing to give you a loan? If for some reason you default, is there going to be a property that’s put up? Or is your house put up? Are you going to sign a personal guarantee? They’re going to look at the net collateral.

Those are the things that a bank is going to look at as considerations for a loan. You want to keep that in mind as you develop your business metrics.

2. Financial Perspective

There’s a couple of important metrics from a financial and banking perspective. The bankers look at a couple of key financial ratios, that are important to them in giving you a loan. It’s called the debt service coverage ratio.

Next, here are a couple of financial terms that are what the bank looks at. Usually, it’s your EBITDA over your debt service. EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization. That’s the bank’s way of saying, how much cash is the business generating?

They look at the cash that the business generates compared to the loan payments. They want to see that your business can pay for that loan. The smallest is going to be a one to one ratio. That shows that you can pay off that loan, but more likely than not, they’re going to want to see a ratio of 1.25 to 1.5 to one.

Show that you have 25% more cash generated than the loan that needs to be paid. They want to see a little wiggle room or margin for error. This is in case the economy goes down or you have a hiccup in your business. They want to make sure that they get paid, so they want to have some cushion in there before they give you a loan.

Again, I like to look at metrics from the banker’s perspective. You want to make sure that you’re keeping them happy.

3. Investors’ Perspective in Business Metrics

Another perspective to look at is from an investor’s perspective.

For example, you want to have an investor help you and give you a cash infusion to help you expand in the future. Or say you want to sell the business someday like most business owners would. You want to look at it from the perspective of what an investor see in your business.

They’re going to look at a few things. They want to make sure business is generating cash. They’re going to look at the EBITDA figure earnings before your noncash items. For example depreciation amortization.

How much cash is business raising? How much cash flow that you have?

What are the gross margins of the business, you know, are you profitable?

They’re going to look at those types of things. They’re going to look at whether you have any significant assets in the business like:

  • Any particular expertise
  • Intangible assets or hard assets
  • Buildings
  • Some minerals underground, gold

Whatever those assets are, they’re going to look at that. And you want to consider how an investor is going to look at your business.

business metricsBusiness Metrics: Indicators That Matter

KPIs are metrics that are unique to your business and tell you about the health of your business. They might be revenue and revenue growth, for your particular business. As well as how much cash you have and what you do that helps you to conserve cash.

Also, there’s going to be some operating metrics. A lot of businesses look at DSO, day sales outstanding. That refers to how fast you’re collecting your receivables.

You want your DSO to be low if you have terms of net 30. Well, most businesses can’t collect them in 30 days. But if you collected them in 40 days, where your customers are paying 10 days late, that’s pretty good. You want to track that.

If it starts to go up, you know you have a problem. You want to do something to counteract that. Get on the phone, call your customers and ask them why they’re not paying. Or, offer a discount if they will pay on time.

Another operational metric that’s common is you’ll look at inventory turns. How fast is that inventory sold? And how much are you having to invest in that inventory, before you get cash from the sale of it?

Those are some common KPIs. Other operational metrics are super-specific to the business. For example, a cloud software-based company. They’re going to look at it at churn rates, or the cost of customer acquisition. Those things depend on the business. You want to come up with metrics that are operational and unique to your business.

Contact Mission Accounting today for your free consultation.