As the opportunity for recovery from the COVID 19 Crisis becomes closer to reality, this seems to be an appropriate time to review some of the important metrics that you can track with your Profit Gap reports for a successful re-start of your business. Or, if your business has somehow prospered during these difficult times (eg: Bicycle Shops), the essential metrics we cover below remain important as your business continues to grow and prosper.
The first and most obvious characteristic of a great business is High Profit Margins. (Income Statement Ratios on your Profit Gap Scorecard): High margins are proof of a great brand, a superior product, or other factors that permit greater than normal profitability. If your business in the process of recovering, this is an appropriate time to reevaluate your profit margins to ensure that your margins are appropriate for the recovery process. It is always important to see how your business compares to the industry data Profit Gap provides. It should be noted that the Industry data is a collection of data points over a five year period, so the effect of the current pandemic are not in these numbers.
Second, Return on Investment (metric number 8 on the Profit Gap Scorecard): It is essential that your company is able to distribute adequate returns (profits) to its shareholders (owners). Keep an eye on this metric as you navigate your recovery process.
Third, Debt to Worth aka Debt to Equity (metric number 3 on the Profit Gap Scorecard): The recovery process begs for the creation of debt to bridge the gap back to profitability.
However, the prudent approach may be to keep debt as reasonable as possible. And, if you were able to take advantage of government programs to help you through the crisis, be careful to keep those funds in perspective as part of the re-building process. In other words, ensure that your company is able to produce adequate revenue to safely cover the costs of its debt.
This is one place in particular where the Industry Standard Column of the Profit Gap report is very relevant. If your company were to drop into the lower percentile of its Debt to Worth metric, that would be a “danger” sign.
Fourth, Return on Assets (metric number 7 on the Profit Gap Scorecard): This is one of the best measures of the overall quality of your business. ROA is an overall measure of how efficient a business’s management is at generating returns on total capital employed in the business.
Putting all of the above factors together, you can consider these metrics a “Profit Gap test” that starts with your Profit Margin… How much money, in cash, does your business earn from its operations, expressed as a percentage of its sales? The higher the profit margins, the better. This tells you if your company maintains a high-quality brand or product(s), and market position. All-together, companies that perform well on all of these metrics should expect high operating margins.
From our perspective, the beauty of this is that it clearly demonstrates one of the values of your Profit Gap report. The calculations for each of these important metrics involve math that would take a great deal of time to calculate on a regular (monthly) basis – your Profit Gap report does this math for you so that you can focus on the best strategies for improving and maintaining your profit margins.
A business that does well with these metrics doesn’t need lower interest rates or a raging bull market for a successful recovery. As your business recovers (or grows), you will be able to increase your payout amounts, year after year. It’s the compounding effect of this growth that makes business owners wealthy.
Stay Safe and Profitable!