4 Small Business Metrics To Get Sales &Amp; Financial Results

Decision making and small business cash management, at times, get overwhelming owing to milestones and to-do lists involved. Not just centralized on keeping tabs on the financial health of your business, you also need to have the acumen to allocate capital to pay expenses. And then comes the retirement dream which could only be realized if you pinpoint right concerns to address.  The following guide is all about understanding some key strategies which could help your money management skills to plan for the unforeseen eventualities.

Let’s talk about some of the unique financial challenge small businesses face and why good money management is so important. Then we going to cover 5 steps or best practices for small business owners like:

  • Why Good Money management matters
  • Separate business and personal expenses
  • Review business as financial
  • Pay yourself an actual pay check
  • Save for retirement
  • Plan for personal and business finances

Small business path is very rewarding, but it does come with its own set of financial challenges. So, what are these challenges for small business owners?

It has been seen that, at times, many business owners struggle to understand business finances and personal finances are basically one. So, if one decision made on the business side could impact the well being or status of the other.

And that is why there is a difference between working in a company (which doesn’t necessarily impact our personal finances and you are part of a system) and being a small business owner. In the latter, everything has to start by you as you guide the system. Lack of resources can impact your decision-making acumen. And that is why you should learn the ‘2nd language of SMB’ i.e. Finance. As time flies, you flip over the personal side and then comes your retirement etc.

But wait. There are options in Financial advisor or a financial cost.

Yes. They are but are they really capable of connecting the dots between ‘selling your business’ to ‘how much can you make out of it?”. So, it’s almost like you are on your negotiation on both sides of the finances.

Now, some practical strategies and steps to take control of those finances:

1. Keep Expenses Separate


One common mistake small business owner make is the usage of personal account for business expense management. This is critical for many reasons as it can hurt both your personal and business finances. Moreover, fees for business accounts. So, it is advised not to intermingling stuff is tough to understand when it comes to profit and loss statement. 

  • Make sure your company has its own bank account
  • Don’t put personal expenses on the company card

How do mixed expenses hurt you? – At first, it is extremely important to understand how your business is performing. And if you have no clue what’s going on either side, be ready to embrace the ignorance of getting the details of that profit and loss statement which tells you if the business is going smooth without any perennial problem. Also, it becomes tricky to figure out if, on a personal side, are you covering all your expenses or how much you need when you hang your boots after turning 60.

Red signal to IRS: Moreover, if you mix your personal and business funds the IRS could see it as an unwanted flag. Not just it makes tougher for them to gauge your business, things could go south in case you plan to sell your business sooner or later. If they sense any mismatch of everything on the personal side, it might pave way for them to dig the business side much deeper. On top of all this, if you happen to be the owner of an LLC and things are not at place like insurance or no separation between the accounts, chances could be that you might end up getting your protection dissolved.

A battle to sell your business: Secondly, you might face lots of stumbling blocks of selling your business. If a prospective buyer pays a visit to discuss and sees your personal stuffs in the financials, be ready to see a nay-sayer in him as he would need to more work just to understand what lies there.  In order to offer more chances for him to buy your business, you might think of lowering the profit (to pay less taxes and drain out the personal expenses), it might make him to think “That’s expensive” because your multiple going to be lower as you showed your profits to be lesser.

Takeaway? Do not comingle your business and personal accounts.

2. Make sure you review financials every week


It is extremely important to keep tabs on the numbers. This is what depicts the teething problems as you go ahead to manage your business finances. It is always better to see them at the start before things go out of control. Be it problems related with margin or expenses, if you are agile and spend time in weekly analysis of financials you would be successful to catch these problems on time

3. Key Metrics To Keep Tabs on

It is very important to keep the bottomline of business in focus. But do you what indicators will drive the aspired results? Following are the  5 main drivers which actually show progress of a SMB.

1 - Profit: Ultimate aim is and should be profit. But when we get over-obsessed with it so much that we literally spend everything to get achieved. We all want profit but when it comes to revenue and if you keep adding work to achieve more of revenue, it yields no benefit. There should be a proper growth plan to go the next level. For example, in the next 3 years, you want to re-invest everything you achieve to reach somewhere to the breakeven and then make profit.

Let’s understand this with an example. Company X’s expense is $900,000 to sell $1 million in sales. That leads to the profit of $100,000. Likewise, there is another firm Company Y which coughs up, let’s say, $400,000 and makes a profit of $100,000 by spending $500,000. So, both Company X and Y are on the same page as far as making profit of $1000 is concerned. But the burning question is who is the more profitable?

That’s where we need to keep tabs on cost shits when we keep adding works/tasks to achieve profit.  If cost and profit are not seen immaculately, things could go haywire. Going by the same example as discussed above what if the same Company X spends $200,000 in health insurance costs, and those costs increase by 10 percent. That increases insurance costs by $20,000, reducing profits to $80,000. Company B spends $100,000 in health insurance costs. The 10 percent increase cuts into the bottom line by just $10,000, and profits drop to $90,000. Company B is now making $10,000 more in profit than Company A.

Takeaway – Be mindful of additional costs and cost-cutting measures to increase profitability and persistence.

2 - Revenue: revenue is something we cant ignore. You should be aware of what line your target is. If you have more than one product or your small business has bouqet of many services, you should track them individually instead of as a whole. Advantage is if a particular service is not generating revenue, you can always tick it off and would be able to understand what to offer next to your customers.

3 - Margin: When we talk about margin, it has many forms with a simple concept. These are your profitability ratios. In short, it’s the percentage of revenue your business keeps. So, its change over a period of time holds immense importance. If it starts to deviate from its consistency, it will tell you that there is a problem.

So what you are doing is that you are

a- Net income/revenue

b- Multiply the result by 100.

For example, John runs a hardware store. Now he wants to invite some investors and seek their interest. Only concern of the people interested in John’s store will be to know how much money the store is bringing in.  This is where the formula comes into the picture.

Revenue = $ 1000
Cost = $ 300
Gross profit = $700

Travel = $ 50
Electricity = $ 30
Delivery/Supply = $60

So, total expense = $140
Net income = $700-$140 = $560

Now, divide the net income by revenue i.e.  $560/$1000 = 0.56
Finally, multiply the result by 100. Result = 0.25*100 = 25%

So, there are more margin ratios like the above. So, depending on the industry or domain your small business you can track other margins like operating profit margin, tax profit margin and net margin.

Takeaway – You might want to look at the bottom-line (instead of operating margin) in case when you are in a product business. Here, you would want to track and make sure that the cost of goods sold is not deviating too far. So, you might track your operating margin and your net profit margin. So, you have to keep tabs on both of them.

4 - ROI:

Getting ahead of margin, let’s consider the factor called Return on Investment. We can measure in various areas but you are going to get your net profit divided by the cost of your investment and multiply that 100. What you are doing here is evaluating how good your investment was.

Sales Growth - Marketing Cost) / Marketing Cost = ROI

So, if sales grew by $1,000 and the marketing cost $100, then the simple ROI is 900%.

(($1000-$100) / $100) = 900%.

5 - Customer Lifetime Value: This is the best friend of ROI. Basically, CLV tells you how much money your client will bring in over his relationship with your business.

Easy to understand formula is LTV = Lifetime Customer Revenue – Lifetime Customer Costs

So, for example, if $100 is invested to bring a customer and on average they love your service and stick around with you. They spend $2000 with you. And with this $2000 you can increase the advertising budget. So it helps you to understand what you need to do stay even.

4: Pay Yourself

There are couple of reasons.

First one is – if you want to sell your business or if you are structuring your business to eventually sell it in order for somebody (investor) to be interested in it they want to ensure that there is an inbuilt salary for a manager.

So, if you are not paying yourself but you are the one running the business and you turn around to sell it, depending upon your profit levels, it would again lower the value of the business. It might even make it to the point that it’s not just sellable. So, if you are not paying yourself and just taking out the income from the profit, as a dividend, then that eliminates any benefits for a future purchaser.

Secondly, paying to the personal side, most business owners get stuck with the headache of how they could go the extra mile anytime they want to things like—buy a house, claim social security etc. We have all these extra works to do. However, if you are actually paying yourself and giving yourself the w2, so that you could say – here is my pay cheque in my account, it makes process for the above-mentioned aspirations a little bit easier.

Additionally, the older we become and if we are not paying ourselves through a payroll company ,we don’t get social security. So we want social security to do everything like that. There are lots of benefits if we pay ourselves.

So, how to get it done? –  First step is to get in touch with a CPA. Presence of a good CPA helps in understand how much should we pay our self. Moreover, kind of busiess structure lies in your SMB, IRA has its own set of requirements about underpaying or overpaying yourself. The body wants you to be in tandem with the industry standard of wages. Main motive behind such standard is that IRA wont like you to be underpaying and then try hands on taking a large dividend. So, your CPA is the best start to have.

Let’s suppose you are into car rental business. In the company you not just operate but drive also. So, you can pay yourself a manager’s (depending what level of experience you claim ) and everything is hunky dory. Another possibility could be is that you don’t drive but manage the business.

In such case, you would like to pay yourself something like an office manager’s salary. Size of your business can also play a role in the amount of salary you want to pay yourself.

In the final analysis, if you try to imbibe the abovementioned metrics and values to your small business management plan, work, sales, and financial results might go to the next level.