I keep meeting several Business Owners on regular basis. One of the Business owner was Ted. While there are great things to learn from Ted, I was frightened when I got below answers on how how he monitors his business?
- Balance in Bank Account
- How I am doing on my sales
- Gross Margin at superficial level
Ted has been in E Commerce business. He sells things at reasonable Gross Margins, Collect Cash immediately and Pay his suppliers at 60 days credit. So all in all… he had positive cash balance and illusion that he was making profit.
However, at the yearend Ted use to complain why the net profit margin was paper thin. I had to sit down with Ted and explain him the flow between Gross Profit and Net Profit. I made Ted realise that one of the expense (freight) was eating into his Gross profit disproportionately. We jointly worked together to charge back to the customers while ensuring he has competitive edge.
Further, we both worked together to change Ted’s Myopic view about Business and developed a monthly monitoring dashboard. It included the following key Performance Indicators
- Gross Margin Ratio
- Net Margin Ratio
- Costs as a % of Revenue
- Costs per employee
- Fixed Costs Ratio
- Break Even Point
- Solvency – Current Ratio
- Gearing – Debt to Equity Ratio
- Inventory Turnover Ratio
- Return on Capital Invested Ratio
Based on the above KPIs, Ted took decisions and has now been able to earn in first 4 months what he earned during the entire previous year. If you want to learn more about these KPIs… Read More
This is how you can calculate the above KPIs: