Just as you rely on your car's gas gauge to alert you to the need to refuel before your tank is empty, the value of business metrics is their ability to expose potential problems before they become crises.
The best financial metrics accurately track progress toward specific goals, so wise goal-setting is key. Review last year's actual performance, then set goals for income, cost of goods, gross margin, operating expenses, and net profit. Set goals that are grounded in the reality of past performance, making sure your monthly financial statements are accurately adjusted for work in process, and summarizing your statements in a budget tracking report.
Do your monthly financial statements give an accurate picture of the true value of work completed and the direct costs required to complete it? When income and COGS (cost of goods sold) figures are inaccurate, statements are not useful as a management tool because analytical ratios (gross margin percentage, etc.) don't accurately reflect company performance.
To yield usable management information, the “income” and “COGS” figures in your P&L statements must be adjusted for work in process (WIP). Adjusted income should reflect the value of work completed, not the value of work billed or cash collected. Similarly, COGS (direct costs) should reflect the actual costs to complete that work; not simply invoices received or bills paid.
Work with your accountant or financial consultant to ensure that your financial statements reflect the true value of work completed and true costs of completing that work. Once you have accurate financial statements, summarize them in a budget tracking report to see “big picture” company performance at a glance. Categories should include income, total COGS (labor, materials, subcontractors, and other direct costs), gross margin, total operating expenses (marketing, payroll, office, and admin), and net profit.
When this report is completed as a projection, it becomes a budget. Setting yearly and monthly goals in each of these categories provides the financial road map for your company, and your monthly budget tracking report helps you stay on course.
Richard Steven is president of Fulcra Consulting, which advises remodeling companies on management plans; www.fulcraconsulting.com. To request a copy of the budget tracking report, contact him at email@example.com.