As an accountant and owner of Nth Degree CPAs, I often have the honor of startling many of my clients by suggesting they shouldn’t only pay attention to the bottom line. When it comes to a company’s financial certainty, most companies make measuring profits job #1. And 2, 3, and 4. You get the point. If you want your company to be truly financially stable, there’s a lot more you should be measuring. The bottom line matters a lot. The lines in between need your attention too.
It’s easy to slip into all-or-nothing thinking — and when it comes to measuring performance, you just can’t do that.
Depending on your company, structure, products, and services, there’s an endless array of possibilities for what you can measure. But let’s start with a few ideas you may not think about, but have important roles in predicting your overall financial health.
Customer Profiling
Sure, total sales are a great indicator of performance. Only a bad business would ignore sales data. But dig a bit deeper, and ask yourself: who are the customers? Are they repeat buyers? Friends of customers? Make sure you measure and have a clear sense of customer loyalty and lifespan as well how many new customers you’re attracting vs. how many current customers you’re losing. This will go a long way toward predicting your current ratio — or, whether you’ll be able to pay the bills in the future.
Debt-to-Equity
It may seem a bit obvious, but your company’s solvency is pretty dang important. So, while your head’s down on the day-to-day, be sure to come up for air now and then to check in on your debt-to-equity ratio. For long-term stability, you’ll need to see trend lines of equity outpacing debt. Even better, look for debt heading downhill while equity heads up.
Investment Trends
Are you spending a bigger percentage of your budget on marketing than you did last year? Using less of your facilities budget than you planned for? Maybe corporate travel costs are getting out of control?
Making clear, marked baselines and closely following your investments and where you’re spending your money all year long vs. just at the annual budgeting meetings can save your company money. Not to mention helping you use your money better.
Pay Attention to the Forest
The ideas I’ve offered here are just some of the things that may contribute to a company’s financial certainty. For your specific business, you’ll need to dig in and find the most appropriate things to monitor. But at the very least, hold onto this idea: don’t lose sight of the forest by looking only at the trees. For example, if you run a service-based business, the only metrics that really move the needle for financial certainty are realization, utilization, and revenue to compensation. If you get stuck focused too much on any one of those, you may lose sight of the rest of your business. And that’s never good for your bottom line.
