As an entrepreneur and small business owner, your company’s sustainability and growth prospects are reliant on the financial health of your organization. And at Evolution, we feel that not only understanding the financial levers that drive your business are imperative, but monitoring these identified predictive financial metrics on a regular basis are just as important. This is why we have defined the first pillar in The Five Pillars of Business Freedom (SM) as Financials.
Which Metrics Impact Wealth Creation?
As the old adage goes, cash is king, and so too are profits, as discussed with business financial expert and author of Simple Numbers, Straight Talk, Big Profits!, Greg Crabtree, on an episode of The Second Stage. Mr. Crabtree shares with us metrics he has identified through his work with entrepreneurs all over the country and across various industries, which have a tremendous impact on the success of a business as well as the wealth creation of the owner(s).
These key numbers include:
- Profitability—Mr. Crabtree denotes profitability as the biggest driver of cash flow
- Revenue
- Gross Margin—which Mr. Crabtree views as a business’s true top line, calculating as Revenue minus Direct Costs (not including labor)
- Operating Expenses
- Direct Labor Efficiency Ratio (“LER”)—gross profit per labor dollar
- Management Labor Efficiency Ratio (“LER”)—gross margin divided by management wages
- Core Capital Target—This allows a small business owner to define how much cash is enough to sustain the business. And anything over and above this mark, the owner has the freedom to decide whether to reinvest in the business or harvest for him/herself.
Tools and Great Reads For Profitability
To better understand each of these key metrics, and to get started, we would encourage any business owner to invest the time to read Simple Numbers. For a copy of the book, please contact me. You can also access free profit tools on Mr. Crabtree’s website.
During our discussion, Mr. Crabtree also mentioned Alan Miltz’s, The Power of One principle, which evaluates the cash flow potential of a business. Tools to analyze The Power of One can be found on the Gazelles website.
Profitability is the greatest driver of cash flow, and with cash comes opportunity! Empower yourself with the ability to begin working ON your business, not IN it.