There are many different ways that your business can establish a competitive advantage. Some of these methods will be much more accessible than others. For example, while some business strategies may require a large amount of capital up front, creating a competitive advantage through better accounting practices is something almost all businesses can immediately do for free.
By constantly striving to improve your business’ accounting practices, you can consistently enhance your bottom line and operate more efficiently. Though accounting and bookkeeping can often feel quite tedious, their universal importance should not be ignored.
Investing in outsourced accounting solutions can help your business thrive. This is because in order to improve your approach to bookkeeping, your business will need to pay close attention to certain details provided by experts. In this article, we will discuss five of the most pressing accounting metrics for your business to pay attention to. We will also cover how focusing on these metrics can give your business the competitive edge you’ve been looking for.
Revenue to Expense Ratio
Both your revenues and expenses can be immediately taken from your business’ annual income statement. While net income (revenues less expenses) will be an important metric, it only paints a partial picture of your business due to the fact raw income figures are not appropriately scaled.
Looking at the ratio of your business’ revenue streams to your expenses will help you determine if you are moving in the right direction. In order to maximize the usefulness of this ratio, you should actively track it over time. If expenses have increased without corresponding revenues, then it may be time for your business to reevaluate its overall strategy.
As any experienced business owner will surely agree, it is much easier to keep an existing customer than it is to go out and find a new one. Because of this, your business will want to retain each of your customers for as long as you possibly can.
Looking at retention rates will help illustrate your customer’s level of satisfaction more accurately than customer surveys or other more traditional metrics (though these are still useful). If possible, you may also want to consider tracking the “lifetime value” of each of your prospective customers. With this information in hand, you will be able to develop a notably more precise marketing strategy.
Debt to Equity Ratio
Using your business’ balance sheet—which provides a “snapshot” of your business at a specific point in time—you will be able to determine your assets, liabilities, and total equity (assets less liabilities). The debt to equity ratio is calculated by dividing your total liabilities by your total equity.
Ideally, your business will have a greater level of equity than debt, though this is rarely the case for new businesses or businesses that are planning a major expansion. Still, by using the debt to equity ratio, you will be able to determine your general financial status and current level of profitability. This ratio will also be very useful when deciding whether applying for new debt can be financially justified.
In order for your business to operate as efficiently as possible, developing productive inventory practices will be absolutely necessary. Good inventory practices will be even more important for businesses operating in the restaurant industry, where inventory will have a limited usable lifespan.
In general, you should aim to keep your working inventory somewhat low while simultaneously making sure you avoid inventory shortages. By paying close attention to your inventory turnover, you will be able to decide which inventory practices are best (FIFO vs. LIFO), where capital can be used more efficiently, and which products have the highest levels of demand.
The current ratio is somewhat similar to your debt to equity ratio, and will also be calculated using information from your company’s balance sheet. The current ratio is calculated by dividing your total assets (what you own) by your total liabilities (what you owe). This will help illustrate whether or not your business is financially solvent.
If your business has significantly more liabilities than assets, you will have a difficult time securing further lines of credit. Furthermore, assuming that at least some of your liabilities are actively accruing interest, a weak current ratio can also have a negative impact on your profit margins. While having some debt is usually considered a good thing, it still needs to be carefully managed.
In order to make decisions that are truly in your business’ best interest, you will want to get as full of an understanding of your financial situation as you possibly can. By paying attention to these valuable metrics, your business will be able to decide whether assuming a new project is actually a good idea. For further guidance and expertise, you may also want to consider hiring an eCommerce bookkeeping specialist.