Running a successful business, all boils down to having an amalgamation of art and science. At times, you need to go with your gut, while other times call for crunching numbers. Businesses must measure financial metrics to understand where they’re at and ways they can evolve.
Gauging financial metrics is crucial to making profit, after all, it’s how a business strives. If you’re after cold hard facts about your business’s financial performance, then this is the way to go. If you lack this information, you can only guess what steps you need to take to make more profit, which is a rather risky approach. AIS Software wanted to make it easier by selecting the top three financial metrics you should be measuring.
1. Total sales
How many times have you asked the question: “How well are my products selling?”, we’re guessing, quite a number of times. Also known as Gross Sales, the Total Sales Metric is perhaps the most important metric for businesses which allows you to answer such a question.
What’s more, you can also project future sales – which is particularly useful to small firms, who regularly want to safeguard investment in the primary stages of their business venture. When trying to close a deal, small companies need to illustrate their sales performance so investors can see whether the offering being sold is feasible and whether sales trends are growing or diminishing.
Whether you want a synopsis of your sales performance or you’re seeking investment, it’s important to look at your total sales figures across a number of years, where conceivable. Month to month sales can be ambiguous as they’re deeply reliant on external influences, such as national holidays and seasons which are beyond your control.
If you have the historical data to compare total annual sales, you can get a more precise indication of how your business and products have grown over time and forecast, based on past trends, how many sales you’ll make in the future.
2. Gross margin
As opposed to total sales which only shows you your revenue stream from products sold, Gross Margin gauges the profitability of your inventory. This metric doesn’t include costs outside your inventory, such as functional costs like wages, rent or marketing campaigns. This metric is essential since it lets you see how well your inventory is operating.
To evaluate your gross margin, you need to deduct the total cost of goods from sales produced and then divide this number by your total sales to get the gross margin percentage.
3. Net margin
Many start a business to turn their passion into profit. Many companies are examples of real-life success stories who have managed to achieve this. To be able to expand their business, a company firstly needs to know how much profit they’re making.
Also called Profit Margin, Net Margin is an indicator of the overall profitability of your business. In order to make future decisions based on positive revenue, or the cash actually available to you, sans all your expenses, you need to track this metric. Net margin not only takes into consideration inventory outlays, but also all your outgoing costs.
Undoubtedly, small business owners need to measure their financial data to advance their business. Measuring metrics is an indispensable part of this process. They give you insight into your financial performance that you can’t get anywhere else. As long as you track your incomings and outgoings, you’ve got the necessary information to calculate your sales and profitability at your fingertips, only then can you decide on your next move.
So, if you want to get a better grasp of your financial performance and boost your profitability without spending hours skimming through spreadsheets, try these three metrics. Better yet, invest in great software and contact one of Malta’s leading software companies AIS Software.