Ah the books, as entrepreneurs we often shy away from really doing a deep dive on our financials. We hire a bookkeeper and set up with an accountant and we get to work doing what we know how to do best, which is anything but the books.
In my experience running a contracting business, there were three numbers that meant the most to me. These metrics always accurately told me what was going on in my business.
- Lead Conversions – We knew that every residential lead that converted into a customer was worth on average $750.00 and every commercial lead that converted into a customer was worth on average $4250.00. We also knew that we converted residential leads 85% of the time and commercial leads 60% of the time. This allowed me to look at what was in our pipeline and I could very accurately tell you what our sales would be for the next three months. Very helpful to know when trying to plan for operational needs.
- Payable/Receivable Variance – Having $20,000 in collectible receivables sounds good but it actually means nothing if your payables are $25,000. We always knew our business was financially healthy when our receivables exceeded our payables by a margin of 35% or more.
- Net Profit – Sales and gross profit only tell you part of the story. What you get to keep after everyone is paid, that is what is important, remember that you have to include your employees, suppliers, lenders, and the various safety and government agencies in the list of who get paid first. Net profit, actual cash in the bank, is what every small business owner who is self-funded needs to focus on.
Of course, there is so many other metrics to consider and what is important to one business is not always the same in another business. We created a master spreadsheet that was a sales projection, expense report, and a cash flow statement all in one. It was very efficient to be able to see exactly what was going on in our business. Don’t shy away from the books, ask for help if you have to, educate yourself and make it a habit of analyzing the metrics of your business.
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