Business Basics: Performance Metrics

Tracking these numbers are table stakes for a small or mid-sized business owner.

As the owner, it's not necessarily your job to compile these business performance metrics, but you should certainly have your controller/CFO present them to you on a monthly or quarterly basis.

Performance Metrics

You all know and understand your gross profit margin. In a perfect world it should be benchmarked to (or beating) your industry and growing year-over-year.

Contribution margin is an often overlooked metric that is critical in evaluating different product lines or revenue streams. It can be tricky to calculate at first but is certainly worth the time.

Profitability Ratios

Similar to gross margin, you all know your net margin. Calculating your return on equity, however, may be new. It's a simple equation, and should be considered if you want to start thinking from the perspective of a third-party investor or buyer.

Cash Flow Ratios

Cash is king, especially for middle-market businesses. While EBITDA commands a lot of focus, free cash flow and operating cash flow can give a better sense of how the business is operating in real life.

Particularly for capital-intensive businesses that notch hefty depreciation expenses year by year, the cash flow statement should be put on the same pedestal as the P&L.

Efficiency Metrics

While these examples are tailored more toward goods/manufacturing businesses, efficiency metrics exists for all industries. These ratios can generally be thought of as the relationship between revenue and the elements of a business that generate that revenue.