We all remember the old days in school when we received a report card after each term. Now that you are running a business, you should have a report card to track your business’ progress. A business financial report card is a useful and important management tool to measure productivity and help you design a business strategy based on these metrics.
Every owner and/or manager of a business should develop a report card customized to track key strategy and business plan components. At LCW CPAs, we guide our clients to customize the specific criteria for a report card that becomes an integral management tool for your business.
Here is a sample of key metrics for a business:
How successful is your business from a financial standpoint? The financial ratios below can help you accurately grade your business.
Return on Equity (ROE)
This ratio measures profitability as it relates to the investment or money you have tied up in your business. The formula is Net
income / Average equity. An ROE of 15 percent or more is an “A” for your business report card.
Return on Assets (ROA)
This ratio measures profitability as it relates to your business assets. The formula is Net income / Total assets. An ROA of five percent or more is an “A” for your business report card.
This ratio measures the efficient use of your business assets. The formula is Sales / Total assets. This number should be high for low margin businesses and low for high margin businesses.
How profitable is your business? You likely know your bottom-line number, but it is important to monitor other profitability metrics including the following:
Gross profit margin
This ratio measures the financial health of a company as it relates to how much money is available to cover your overhead. The calculation is (Revenue – cost of goods sold) / Revenue.
The value will differ by industry, but a general rule of thumb is that a range of 25 to 35 percent is desirable.
Net profit margin
Net profit margin measures how profitable your business is in relation to sales. As an example, a business that can make $50K in profits on $500,000 in revenue is healthier than one that makes $50K profits on $3 million in revenue. The formula is Net income / Total sales, and although it depends on the industry, a net profit margin over 10 percent is considered an “A.”
As a business owner, you may not have the bandwidth to regularly calculate and utilize all of the metrics above. We offer Outsourced CFO Services to help many of our clients have the peace of mind of knowing they have the knowledge and experience needed with a fractional CFO, saving the overhead and full-time employee costs that do not make financial sense for your business.
Report cards were important in school to track progress, but they are even more crucial in business to identify opportunities and potential issues before it is too late.
Contact us any time to discuss whether a fractional CFO makes financial sense for your business, including establishing and managing your customized report card.