I’m excited about the New Year: a new year always heralds new opportunities, and a chance to work on planning for the coming 12 months. Whilst it is easy to have plans such as ‘Do bigger projects’ or ‘Make better websites’, these are pretty vague goals. In order to look at creating new goals, I always look to the previous year to get a sense of where we’ve just been.
Here are six metrics you can get from your accounting that will help explain trends in your business.
This figure is important, however it isn’t as important as we may all be led to believe. What was the pre-tax income your business made last year?
This is where the money is, pardon the pun. Although turnover is nice, profit is what puts food on your table. What was your actual income after taxes, payroll, leases, insurance and other costs?
This is the percentage of turnover that equals profit. Say you made $500,000 turnover, and $100,000 profit, then you have a healthy 20% profit margin.
Average project cost
This is a very interesting figure. Looking at your turnover, divided by the amount of projects you completed in 2011, gives you your average project cost. Sure, some projects will be big, and more will be little, however this is still a great metric to have on hand.
Turnover per Client
Do the same calculation as projects, however this time use the number of clients you invoiced to give you a turnover per client figure.
Now that we have these five figures, we can start to work out some interesting figures. For example, using your calculated total turnover and total profit divided by 12, will give you your average monthly turnover and profit.
The goal now is to beat these averages every month – you have a base target now, so who wants an extra 20%? Let’s set a stretch target and aim for it every calendar month.
Using average project cost, you now have a target to beat – see if you can only work on projects with a higher income than your average, and avoid those with little margins.
Let’s work out your average profit per client. Using your profit margin, you can now work out the profit percentage of turnover per client. Now there’s a figure that you must aim to beat – remember, it’s easier to increase profits on the same number of projects this year, than increase your number of projects altogether. Both targets would be a nice fit though, I’m sure you’ll agree.
Now, stick these figures somewhere you can refer to, and take a look at the end of each calendar month. How are you going with increasing your project totals, profit margins and amount of clients? A few percent increase on all three will make a far healthier profit at the end of 2012 – good luck on your journey!