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Making Small Businesses Attractive to Talented Workers

by Katie Ford

These metrics can speak volumes about your company's performance

In the everyday grind of running a small business, it can be difficult to gauge whether your company is performing at its best. Sure, a profit-and-loss statement will reveal the bottom line, but it's prudent to know exactly what to look for -- on your P&L statement and far beyond.

Jim Chamberlain of Counselors to America's Small Business in Orange County, Calif., names two cash flow metrics that every small business owner should understand:

• Gross cash flow (or cash from operations): You'll find this number on the income statement. It's the amount of cash generated after expenses and costs are subtracted from sales. "This is important to the owner, because it measures how well decisions are being made regarding pricing, marketing, hiring, promotion, costs, and expenses. Positive cash flow isn't enough," Chamberlain says. "It has to be at a level that can grow the business and compensate for risk."
• Free cash flow: This is the amount of cash that remains after investments are made in working and fixed capital. It's the cash left at the end of the period before paying bank loans or dividends. "This measurement is very important because it signals to the owner the amount of cash required to be re-invested in working capital and fixed capital to maintain or grow the business," Chamberlain says. With this number, small business owners can evaluate their decisions on accounts receivable, inventory, and equipment purchases, in addition to pricing and costs.

Chamberlain says business owners also must know when their companies are going to achieve cash break-even and at what level of sales. Moreover, with an eye on return on investment (ROI), owners can ensure that their companies are generating enough cash flow to offset the risks they're taking.

"If the ROI is below the reward requirement, then the company is running below average, and that hurts valuations and the ability to grow and attract future capital," he says.

Owners who want to apply for a bank loan in the near future should look at the balance sheet, Chamberlain adds. "How much working capital is required for every incremental sales dollar is a question that owners need to understand and calculate," he says. "Knowing how to calculate A/R [accounts receivable] and inventory turnover is also important."

Mary Cantando, founder of WomanBusinessOwner.com in Raleigh, N.C., cites another important measurement of success. She says your employee turnover and retention rates can speak volumes about your company's performance.

Cantando believes that small business owners need to keep an eye on employee turnover for two reasons: (1) it is costly to hire and train new employees and (2) employee retention affects the level of customer service your company is capable of delivering.

Also, Cantando recommends routinely reviewing your sales reports and asking:

• How many new prospects have been identified since the last review?
• How many sales proposals did the sales team disseminate?
• Of those sales proposals, how many led to a transaction?

Repeat business also is a good indicator of your company's performance. "If you're doing one-shot deals when your business could really profit from having long-term customer relationships, then something is definitely wrong -- either your pricing is off, your customer service stinks, or your products themselves could have a problem," she says.

The remedy? Pick up the phone, talk to your "one-hit wonder" customers, and find out where you went wrong.

It also pays for business owners to continuously look for ways to improve. Says Cantando: "Your business could be doing great and bringing in lots of money, but what would happen if you improved your employee retention rate by just 10 percent? Then how profitable could your company be?"