Business performance measures and metrics are a set of quantifiable measures and metrics taken from various sources of information on your business that, when analyzed, allow for management to track and assess the current status of a specific business project or process.

In a nutshell: performance measures give you the tools to measure your business. Because, bottom line, what gets measured gets paid attention to and managed.

So what measures should you be looking at? We’ve talked about budgeting, benchmarking, and KPIs in past episodes but today we’ll talk about common size ratios.

Common size ratios are a metric that allows you to compare your business with basically any other business regardless of size. Small company? You can use common size ratios to compare yourself to billion dollar companies. How? By calculating each line item as a percentage of the total. Then, it doesn’t matter what size your company is because you’re comparing percentages not absolute dollar values.

You can compare your common size ratios to your competition, industry averages, larger companies, or other benchmarks. You can look at all different kinds of areas from advertising expenses to labor costs to cost of goods sold.

And actually, gross profit margin and bottom line are well-known common size ratios. All we’re doing is extending those measures to every line item on your income statement to make meaningful comparisons, regardless of company size.

This allows us better decision making and to really manage our key numbers.

Using common size ratios has a huge benefit to you as a business owner because the more we know, the better we can manage, and the better decisions we can make for our businesses as well as understanding the financial health of our companies.

Measures and metrics are about bringing attention to the things that matter in our businesses, the things that we have some level of control over. These are important things that we want to be able to keep an eye on and check our progress on.

Operating ratios are another one of those key measures. These are metrics and measures related to the efficiency of your company’s operations. We’re looking at things that are going on within our operations and benchmarking those so that we understand:

• Where we are
• How we’re performing versus a benchmark
• How we’re performing versus an industry average
• How we’re performing against our own internal targets

Once we understand these numbers we can impact them, influence them, change the trajectory of them.

Here are some examples of types of operating ratios:

• Inventory turnover, which tells you how long inventory stays in your business before it’s sold.
• Inventory days, which can give further insight into how many times you deplete your inventory over the year.
• Accounts receivable turnover, which shows how many times you’re turning over your receivables in a given period.
• Number of days sales outstanding, which tells you how many days you have money tied up in receivables.
• Accounts payable days outstanding, which shows you how in alignment you are with your payment terms.
• Total asset turnover, which shows how efficiently you’re able to convert assets into revenue.
• Cash conversion cycle, which can tell you how long it takes your company from first dollar outlay to get those dollars back into your company.

Liquidity and solvency ratios are two different measures relating to the health of your finances.

Solvency ratios look at your business’ ability or capacity to meet its long-term financial commitments, aka long-term debt. A solvent company is a company that owns more than it owes. A solvent company has a positive net worth and enough cash and assets to meet their debt obligations.

A few solvency ratios are:

• Debt to equity, which indicates the degree of financial leverage being used by the business. It includes everything related to debt, both short term and long term. This is a huge one that banks want to understand.
• Debt to assets, which measures the percent of the company’s assets that have been financed with debt. The higher the ratio, the higher the degree of leverage and consequently, financial risk for a lending institution.
• The interest coverage ratio, which measures the company’s ability to meet the interest expense on its debt. It equals operating income divided by interest expense. The higher the ratio, the better the company’s ability to cover that interest expense.

Liquidity ratios are a measure of the company’s ability to pay short-term obligations, like accounts payable and current loan payments. These measures take out the long-term aspect and look at the here and now. This year, do we have the ability to pay all of our obligations with adequate cash?

A few liquidity ratios are:

• The current ratio, which measures the company’s ability to pay off its current liabilities with current assets (which are highly liquid) such as cash, accounts receivable, and inventories. The higher the ratio, the better the liquidity of your company.
• The quick ratio, which is similar to the current ratio except it factors out inventories. It takes current assets minus inventories and divides that into current liabilities to measure the company’s ability to meet its very short term obligations with its most liquid assets.

Again, these measures are manageable, and we need to focus on them. Cash in our business and high liquidity gives us options.

Operational metrics are measures that relate to operating your business. Here are a bunch of examples of operational metrics that may or may not apply to your specific business:

• Sales inquiries
• Calls per day
• Clicks per day
• Calls per day conversion
• Conversion rates
• Sales per employee
• Sales over wages paid
• Absenteeism rates
• Utilization rates
• Realization rates (which look at billable versus non billable utilization)
• Employee turnover
• Employee satisfaction
• First pass yield
• Product costs based on pieces per hour
• Machine throughput
• Sales per labor hour
• Right sales per labor hour
• Machine downtime
• Perfect order rate
• Picking accuracy
• Inventory carrying cost
• Fleet utilization

These are all about looking at things that relate to one another, putting them together, and measuring them over time versus a benchmark. You can put relevant operational metrics into a dashboard to have them right in front of you to make the best possible decisions for your business. And again, you can look at the trends for these numbers and benchmark them against all different kinds of numbers to see the different stories your numbers are telling.

And remember: garbage in, garbage out. If your transactions are recorded incorrectly, your reports are going to be useless. If that’s something you’re struggling with, call TurboExecs – we help people uplevel their entire accounting function.

TurboCharge Your Business is a show for business owners who are tired of just working IN the nuts and bolts of their businesses and ready to work ON the business itself from a big-picture, growth-oriented, strategic perspective. Check out more episodes here.