Many CEO’s try to manage their business by only reviewing their P&L. This is a disaster in the making, it would be akin to driving coast to coast looking in the rear view mirror. In this fast paced world, you need to be nimble and agile, able to respond and make course correctly quickly. This is done with leading KPI’s.
2. What is the company Break Even?
Breakeven is the level of sales needed for a company to attain a $0 bottom line. This seems a bit silly at first as no one’s goal is to break even. You are in business to make a profit, but your breakeven is useful because it gives you a concrete floor. If you are running consistently below breakeven, it is time to look at restructuring your costs to re-establish profitability at the lower sales level. Compute breakeven by taking your fixed cost and dividing by your gross margin%. For example, $500,000 in fixed cost divided by a 20% gross margin is $2,500,000 in annual sales or $208,333 per month.
3. What is your gross margin?
Gross margin is the most important number on your income statement, especially in growth mode. Too many companies grow by reducing margin only to discover they are unprofitable at the end of the year. Be clear on your pricing policies and monitor your margin weekly.
4. How efficiently are you managing your non-cash assets?
What are your major non-cash assets? Accounts Receivable, Inventory, Fixed Assets? Too often CEO’s focus on their income statement and ignore their Balance Sheet. As a result, accounts receivable get old and uncollectible accounts increase; inventory gets stale and becomes obsolete. This is like drilling a hole in your floor and dumping cash into it.
5. Where is your cash position?
You don’t go out of business because you have are losing money, you go out of business because you have no cash. There are plenty of successful companies that spent years losing money, Amazon for example. They stayed in business by attracting capital until they became profitable. Know how much cash is needed to run your business and watch it like a hawk.
6. What is your Return on Investment?
Your business is likely your largest investment. If you invested in any other asset, you would expect to regularly be apprised of your return. Treat your business like an investment, it will kick start you to increase your return. Compute your return on investment by dividing net income before tax by the fair market value of your business.