Evaluating Your Buisness: 3 Metrics You Should Know

Bryce True, AVP Client Treasury Services Manager, and Bryant Hall, Client Treasury Services Officer at Hilltop Bank, discuss how three simple metrics can help you evaluate and achieve your business goals.

Why is Evaluating Your Business Important and Necessary?

Taking the time to regularly evaluate your business’s overall health is important for long-term success. By evaluating your risks, problems, and issues your business may be facing, you are able to strategically plan and set realistic goals. Knowing the current state of your business can also direct you to make smarter decisions that contribute to the bigger picture and reach your overarching goals.

You Cannot Define Your Strategy Without Defining and Outlining Your Goals:

What Are They?

  • To make money?
  • To create a job?
  • Grow your business?
  • Sell your business?
  • Retire?
  • Pass on to the next generation?

Without establishing goals, you don’t truly know where your business is going or what you are working toward. The goals you set today will allow you and your business to determine a starting point and when evaluating your journey ahead, three specific metrics will rise. 

  1. Profit Margin
  2. Net Equity
  3. Operating Cash Flow

1. Profit Margin: Is Your Business Profitable?

  • Profit Margin = Net Income / Total Revenues

Your profit margin measures your business's profitability. Profit margin indicates how much profit is generated from each dollar of sales, identifies trends gross numbers may miss, and helps business owners realize that higher efficiency can lead to a higher profit margin.

2. Net Equity: What is Your Business Worth?

  • Assets – Liabilities = Equity ——> Net Worth

Knowing your business’s net equity will help you understand opportunities for growth, business valuation, and succession planning. Aligning equity ratios to your goals will also allow you to effectively leverage them both to work together. 

3. Operating Cash Flow: Cash Creates Earnings

  • OCF = Cash from sales – Cash paid for operating expenses

A staggering 82% of businesses fail due to lack of adequate cash flow; however, a business can be profitable without sufficient cash flow but planning is necessary in order for this to work. To successfully manage your cash flow and to prepare for stormy days, it’s important to develop cash flow projections, review your credit policies and customer credit history, and review your accounts payable and vendor terms. By managing your cash flow, you can help keep your business afloat by planning for the future, applying for business loans or a line-of-credit, and avoiding unexpected shortfalls. 

How Hilltop Can Help: