What to watch when scaling your business
Strategy is a crucial aspect of scaling your business. But success in growth comes down to planning and managing your numbers well. This is possible by using the right metrics to guide your growth strategy.
Key Performance Indicators
Key performance indicators (KPIs) are quantifiable values that measure how well you perform in revenue, profits, and growth. You need to track these KPIs to assess whether your business can scale.
Working Capital
Working capital is your liquid assets that can meet your short-term financial obligations. This could include short-term investments and receivable accounts. It also contains available cash. These are the critical components of how your business generates money.
Your business's working capital is the difference between your current assets and liabilities. It indicates your company's operational effectiveness. This ratio shows how well your business can pay off short-term debt using short-term assets. Solid working capital is generally between 1.2 to 2.0. Any ratio below 1.0 indicates that you are operating with negative working capital or at the risk of default. If your ratio is higher than 2.0, it could be a sign that you're not maximizing your revenue-generating surplus assets.
Operating Cash Flow
The total cash generated by your business operations is your operating cash flow. This indicates whether you have enough cash flow to continue your business as it is or if you require additional funding. Operational cash flow is the sum of money in and out related to your primary business functions such as inventory, sales, salaries, and services.
Investments and financial transactions that don't fall under your operating cash flow are considered separate transactions.
Current Ratio
The current ratio is used for evaluating your company's short-term liquidity. This indicates your ability to generate sufficient revenue to pay off your debts during a financial crisis.
Current liabilities and assets are the two components of the current ratio.
Current assets are liquid assets that can be converted into cash in one year. These include your marketable securities and inventory, as well as accounts receivable.
Current liabilities are all your financial obligations and debts within one year. They are listed on a balance sheet.
Forecasting Cash Flow
A cash flow forecast is a process that estimates your financial future. This is done by estimating how much money your business will receive and spending over the following weeks, months, or years. This is essential for scaling up, as a company that runs out of cash without getting new financing will be insolvent.
Return on Investment
Your return on investment is the ratio of your profits to your investment. The ROI percentage is used to compare the profitability or efficiency of different investments. It includes marketing money and profits from marketing.
You can create a strategy to maximize your investment options and fuel growth.
Return on Equity
Your net income is the return on equity, which is calculated as a percentage of shareholder's equity. This ratio is used to determine your business' profitability. It shows the amount of profit you have earned from shareholders' investments. ROE can be used to assess the efficiency of your company or compare your profitability with your competition. It shows how much money you have used to generate profits.
Return on Assets
The return on assets measures the company's ability to generate profit from its assets. This measures how efficient your management is in generating profit from invested capital. The ROA percentage varies depending on the industry and public company, but generally, a higher ROA percentage means you can make more profit with fewer investments.
Margin of Gross Profit
Gross profit margin measures your business's financial health and business model. It measures the money left in sales after subtracting the cost of goods sold. Your gross profit margin should indicate stability.
It is possible to adjust the gross profit margin if it shifts due to industry changes or pricing strategies. For example, you can sell a premium product at a premium price if your competitors are selling the same product at a lower price but still keep a high gross margin.
Margin of Net Profit
The net profit margin is the ratio between net income and profit as a percentage of revenue. This indicates how much revenue you make. While net profit margins vary depending on the industry and business size, a high net profit margin means that your business has a strong foundation. You can monitor your net profit margin changes to determine if you can predict and scale your business.
Sales Growth
The measure of a team's ability to increase e in a given period is called sales growth. This KPI is crucial to help you make financial decisions for your business and growth projections.
Sales growth should be tracked weekly or monthly to identify and fix any problems with your team or processes. These issues must be addressed before you scale to avoid any negative trends.
Preparing for Scale
These KPIs will give you an insight into your business's performance and help you decide if it is ready for scale. Although some KPIs will provide you with more information than others, they all add to the overall picture and should be taken together.
Start monitoring your KPIs, assessing your strengths and weaknesses, then develop a strategy for addressing them. Then, you'll be ready to scale up your business.
