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 Cash Flow Compass

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1 actionable tip, idea, or insight to boost your service business finances and shed your stress. New edition every Saturday.

CFC #009 - Money-Maker Metrics, Part 2

Jul 01, 2023

Driving the financial results you want from your business is hard.

It’s even harder if you’re trying to move in one direction while facing another.

Sadly, too many business owners fail to reach their financial goals, because they focus on the wrong things.

This includes obsessing over sales growth at all costs.

Or managing cash based on current bank balances and gut instinct.

The good news:

You don’t have to follow these business owners down the road to failure.

The solution to leading your business to financial success is to discover the right metrics to manage your business’s performance.

Last week, I shared the 4 metrics you must know to make the money you deserve and desire from your services business.

If you missed that newsletter edition, you can check it out here.

As I noted, although these metrics are essential to getting the results you want from your business, they have a key limitation:

They’re all lagging indicators:

They provide a great picture of where your business has been in the past, but they don’t directly help you drive it where you want it to be in the future.

So, today, I’m going to share with you 4 examples of leading metrics - one for each lagging metric - that you can use to create the financial results you want from your business.

Read on!

4 Success-Sparker Financial Metric Matches

A leading metric for Revenue

If revenue is a tree, then your sales pipeline is the seed from which that tree grows.

And your daily activities to nurture leads through the stages of your sales pipeline are the water and fertilizer that make that growth possible.

Which is why Total Sales Leads by Stage is such a powerful leading metric to pair with the lagging metric of your revenue.

By qualifying your leads by the stage they’re at in your sales process (e.g. unqualified lead, qualified lead, discovery call held, proposal sent, closed deal) and assigning a probability of closing to each stage, you’ll have greater visibility into your future revenue.

You’ll also be able to better focus your team’s efforts on nurturing the leads with the highest probability of closing in the near term.

A leading metric for Gross Profit

Your gross profit is what’s left of your revenue after subtracting the costs associated with delivering your services to your customers.

As a services business, your labor costs likely make up the bulk of your cost of sales.

Which makes Labor Productivity an essential metric for controlling your cost of sales and maximizing your gross profit.

Typically, the more services your existing labor pool can deliver in a set period of time, the more profitable your business will be.

One way to monitor Labor Productivity is by considering average units of service delivered per hour.

This requires having clear processes and a good sense of how long a typical service should ideally take to deliver.

Once you have this baseline, you can compare actual results to it each week and work to improve it over time.

This will ultimately help you improve your bottom line.

A leading metric for Net Profit

Between gross profit and net profit are your operating expenses.

Many of these may be fixed amounts, such as rent, if you have physical office space, or administrative staff expenses.

You also likely have several variable or discretionary operating expenses, including marketing costs.

These variable expenses can cause your operating expenses to fluctuate month-to-month.

So it’s helpful to look at your Average Monthly Operating Expenses over several months.

You can use the last 12-months, if spending patterns are relatively consistent.

Or the last 3-months, if spending patterns have recently changed.

Comparing the current month’s actual operating expenses in real-time to the average monthly operating expenses will enable you to make adjustments to planned expenditures as you go.

For example, say you’ve incurred some unexpected travel costs that will increase your monthly operating expenses beyond the average amount.

You could consider holding off on other discretionary items to recoup some of the difference and preserve your net profit for the month.

A leading metric for Cash

Cash is king.

Your business’s financial success or failure depends on how efficiently you’re able to generate cash from sales while covering expenses.

A powerful metric to help you create cash faster is the Cash Conversion Cycle (CCC).

Your CCC equals:

  • your days inventory outstanding (how long you hold inventory before selling it. Potentially 0, depending on your type of services business)
  • plus your days sales outstanding (how long it takes you to collect receivables. The lower this is, the better)
  • less your days payables outstanding (how long it takes you to pay your vendors. The higher this is, the better, up to a point. Ideally, you should take as long as contractually allowed to pay your vendors, unless they offer you incentives to pay sooner. But, you don’t want to take so long to pay them that it damages your relationship with them).

The lower your CCC, the faster your business generates cash.

What’s next?

Now you’re armed with this powerful set of leading and lagging metrics.

When used properly as part of a comprehensive Financial GPS system, there’s no limit to what you can achieve in your business.

AND if you combine them with the additional strategies and solutions I’ll share in the upcoming weeks, you’ll be able reach your desired destination faster, easier, and with less stress.

Stay tuned!

In the meantime, if you’re looking for more, there’s a couple ways I can help you:

  1. Watch my free on-demand training on my 5-step system you can use to get the financial results you want from your business and feel less overwhelmed. Free training here.
  2. I can help free you from financial stress in your $1M+ services business and discover a faster route to the results you need for the life you want. Book a call here.

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