As a business owner or manager, you may have a vague notion that your business is doing well or that it isn’t, but unless you have real facts and figures to support either of these two assessments, you won’t really know how your business is doing. In order to gauge the true financial health of your company, it’s important to constantly monitor the key performance indicators (KPI’s) which are yardsticks for measuring that health. While there are a great many of these key performance indicators which can be used to gauge financial health, three of the most critical are cost of goods sold, labor costs, and net operating income. Here’s why these three are so important to your business.
Cost of Goods Sold
Cost of goods sold (COGS) measures all the expenses your business incurs which directly relate to creating your product, or providing your service. The rule of thumb for identifying these expenses is that if you weren’t creating this product or service, you wouldn’t have this particular expense. For example, some of the most obvious expenses to be included in COGS are direct labor costs and the cost for raw material inventory used in making a finished product.
The reason that COGS is so important as an indicator for business success, is that it tells you all the expenses you’re going to have every single time you make a customer sale. This in turn, is critical to establishing a fair market price for your product. By comparing your COGS to the price you sell your product for, you can tell whether you are making money or losing money.
By monitoring your labor costs, you’ll be able to save money for your company, both in the short term and in the long term, and if you are able to successfully reduce your labor costs without impacting the business, your business will become more profitable. Since the price of labor is one of the most significant overall expenses for any business, it stands to reason that this is one of the costs which should be most closely monitored. Having good information about your labor costs will allow you to make better decisions about how to manage them. For instance, it would be a mistake to downsize your workforce for short-term financial improvement, when that would inhibit your ability to scale up as business increases.
Net Operating Income
Net operating income is the amount of money your business has left over after paying out all the expenses for running it.Once you have paid out all those costs like utilities, COGS, facility rent, labor costs, freight charges, and everything else that keeps you in business, you will hopefully have a significant amount of money left over as net operating income.
If you don’t have positive net operating income after paying expenses, your business could be in serious trouble, and you will quickly need to adjust expenses downward in order to stay profitable, and to even stay in business. The significance of net operating income can’t be overstated, and that’s why it’s one of the most important key performance indicators for gauging the health of your business.
If you need help identifying or calculating these key metrics, BizResults.com would love to help. We are about execution, getting things done, moving the needle, helping the business owner succeed. It’s always exciting to learn about the solutions and challenges business owners are facing daily, and to see how we can work together. We would love to meet with you and hear your story.