The Dashboard Series – Financial Metrics
Helping you keep a strategic eye on your company’s finances
When you start out in practice it is critical to remind yourself every day that you are creating an asset and that your business will one day realise a significant value which will contribute to your personal wealth for investment or retirement. As such, managing the business in a responsible manner will ensure that your daily efforts are rewarded.
Just as you would monitor any investment you make by measuring its growth and performance, your business’s performance needs to be measured and as such, the metrics you monitor are vital.
Most people in business, regardless of whether or not they’re involved directly in finance or accounting, are familiar with the term financial metrics. Common examples of financial metrics include net cash flow (NCF), return on investment (ROI), or earnings per share (EPS).
Metrics refers to measurement, and each financial metric can be used to ascertain important information about a specific body of financial data within your business. In essence, financial metrics are like descriptive statistics, and each says something unique about your particular set of cash flow numbers or financial statement figures.
Financial metrics are used to reveal specific characteristics across the entire body of your business’s financial data which may not be apparent from simply reviewing the various financial figures individually.
While there’s a common tendency to focus solely on turnover, it’s crucial to considr all of the expenses associated with running your business. These costs need to be factored in, and paid, before you can calculate any profit.
Turnover is vanity, profit is sanity, but cash flow is reality!
When assessing your business’s finances, this popular adage should be your mantra. Let’s take a closer look at what it actually means.
Turnover is Vanity: Some businesspeople like to speak freely (or even brag) about their company’s turnover to impress or intimidate their direct competitors or less experienced business owners within the industry. However, more experienced proprietors understand that accurately measuring a business’s true success and performance requires a more comprehensive set of financial criteria.
For instance, when focusing on turnover, it may be more beneficial to analyse quality and composition. One of the crucial practice assessments is contribution to revenue (CTR). Disaggregating (or separating) your revenue channels provides you with a useful benchmark for each of your products or services, and its specific contribution to your overall turnover. Any variance in these numbers indicates a change in trend that you’d need to investigate.
Average transaction value (ATV) also helps you to ascertain the flow and pace of your practice; if your ATV is low this indicates that you’re probably seeing many clients each day in order to generate your required revenue, resulting in a brisk pace of operation.
Profit is Sanity: Your subsidiary stakeholders’ main interest and focus is on your practice’s ability to produce a consistent, healthy profit. Therefore, it’s vital to carefully manage your company’s finances to ensure solid, sustainable profitability so that you’re able to secure ongoing access to the capital needed to sustain and grow your business, as well as attract any potential buyers, investors, or future partners.
Cash is Reality: Money is the lifeblood of any business. Cash reserves, and access to credit and capital are essential if your practice is to continue flourishing well into the future. It also gives your business the competitive edge it needs over competitors whose access to cash is difficult, time consuming, and perhaps even questionable.
Gross Profit and Net Profit
Gross profit (GP) is another helpful, well-known industry benchmark and is defined as the difference between sales and cost of sales (COS). COS relates to the cost of all of the goods you purchase for resale.
While there are some industry benchmarks for GP, it doesn’t necessarily guarantee business success – it’s merely a guide to help you keep track of the industry’s current buying and selling prices. The higher the GP, the more leverage you have to absorb the remaining expenses across your business.
Net profit (NP) is what’s left over when all of your practice’s other costs have been deducted. NP is your accounting profit – and what stakeholders, like a bank, are interested in when reviewing your financial records. This is also the number your tax payable is based on.
40% of turnover is the average industry benchmark for expenses – exceed this and your business is not running as efficiently as it could. Your greatest business expenses are salaries (22%) and rent (10%), with these percentages used as industry guidelines. A factor often overlooked when starting your business is the measure of control you gain in the long term over the rental expense by owning your own property. Rent paid to a landlord, if unmanaged, can become an uncontrolled expense which can cripple your business.
It’s important to ensure that your other expenses don’t surpass these on a regular basis. Occasionally, you may have a large, once-off expense, but typically these two ongoing expenses (fixed costs) should always comprise the bulk of what you have to cover each month.
Debtors Days is the standard measurement of how long it takes to bank revenue in your business – the industry standard being 25 days. Naturally, less than 25 days is great for your business’s cash flow, while over 25 days means you’re financing your clients. As a general rule, always try to encourage payment at the time of transaction, and when dealing with third-party funders, try to ensure that clients have funds available – and submit your claims timeously. Managing debtors starts with the front office and it is critical that all front office staff are trained to clearly and professional deal with business terms upfront.
Understanding what works best for your practice
While industry benchmarks are helpful and reliable guidelines, they should never be seen as the silver bullet that guarantees success. Each business has unique formulae to help it operate optimally and profitably, and it’s crucial that you keep track of all aspects of your company’s performance to understand what works best for you – determine your own practice benchmarks, and always keep track of them!
Industry insights to maximise the success of your practice
If you’re in need of personalised and professional advice on how to run your practice more efficiently, in-line with current industry trends and financial benchmark guidelines, get in touch with Vizibiliti Management Services today.
BY ALISON MAYTHAM
“There are many different factors that determine the success of your practice – but, as a busy healthcare professional focusing on the needs of your patients, you may not always have the time to focus on the many demanding, and often complex, facets of managing your business. Vizibiliti provides you with easy access to insightful, comprehensive practice and business management solutions and advice across all stages of your business journey – from establishing, growing or closing your practice.”