Your business is a machine. Its purpose is to make money. And like any machine, it is made up of parts — sixteen of them. When the machine is not doing what it is supposed to do, the reason is always that one or more of those parts is running below peak performance.
Most small business owners have never seen these sixteen parts written down in one place. That is the problem. You cannot fix what you have not named. Below is the full list, with a plain-English definition of each one.
The Order That Matters
Each of the sixteen parts drives one of three things: revenue (what you sell), profit (what you sell less your expenses), or cash flow (what you actually keep).
Improving cash flow matters more than improving profit. Improving profit matters more than improving revenue. Plenty of businesses grow revenue right into insolvency — revenue is the number owners brag about, and cash flow is the number that keeps the doors open.
The 5 Parts That Drive Revenue
- 01Leads
The number of ideal customers who have been made aware of you.
- 02Conversion Rate
The percentage of leads that become paying customers.
- 03Retention Rate
The percentage of customers who come back each year.
- 04Purchase Frequency Rate
The number of times a customer purchases in a year.
- 05Average Transaction Value
The average value of every purchase a customer makes.
Notice that only one of these five is about getting new customers. The other four are about what happens after someone has already bought from you — which is almost always the cheaper place to find growth.
The 5 Parts That Drive Profit
- 06Cost of Goods
How much it costs you to provide the “goods” for each sales transaction, measured as a percentage of revenue.
- 07Marketing Expenses
The total cost of marketing, measured as a percentage of revenue.
- 08Payroll Expenses
The total amount of payroll not already included in Cost of Goods.
- 09Overhead Expenses
All other operational expenses: rent, insurance, office supplies, software, and the rest.
- 10Other Income / Expense
All non-operational income or expenses, such as income from an insurance payout.
Measuring the first four as a percentage of revenue is the part most owners skip. A payroll number in dollars tells you very little on its own. Payroll as a percentage of revenue, tracked month over month, tells you whether the business is getting more or less efficient.
The 6 Parts That Drive Cash Flow
- 11Days Sales Outstanding
The number of days it takes to collect from your customers.
- 12Days Inventory Outstanding
The number of days it takes to sell your inventory.
- 13Days Payable Outstanding
The number of days it takes you to pay your suppliers.
- 14Sale or Purchase of Assets
Selling an asset such as a truck or machinery increases cash flow. Purchasing one decreases it.
- 15Using or Paying Down Debt
Using debt increases cash flow; paying it down decreases it. Use debt only to buy something that will produce a return.
- 16Owner Investments or Draws
Putting your own money in increases cash flow. Taking distributions decreases it.
These six are where profitable businesses quietly get into trouble. A company can show a healthy profit on the P&L and still be unable to make payroll, simply because customers are paying in 60 days while suppliers expect payment in 30.
How To Actually Use This List
Do not try to fix all sixteen. Pick a number for each part as it stands today, then pick the two or three that are furthest from where they should be.
Improving a single part produces a real improvement in the business. Improving two or more compounds, because these parts multiply against each other rather than adding. A small lift in conversion rate on top of a small lift in average transaction value shows up much larger at the bottom of the page than either one alone.
Then measure them every month. Not once. Every month, against the prior month, so you can see which direction each part is moving before it becomes a problem.
Want Help Finding Which Parts Are Holding You Back?
Knowing the sixteen parts is the easy half. Pulling accurate numbers for each one out of your books every month, spotting which ones are dragging, and knowing what to do about them is the work — and it is exactly what we do for our CFO advisory clients at Tradepoint CFOs.
Each month we analyze your business against these drivers, forecast where you are heading for revenue, profit and cash flow, and give you a short list of the specific next steps that will keep you on track.
If you would like that for your business, schedule a free consultation or call (401) 264-8828.
About Tradepoint CFOs
We are a Rhode Island-based bookkeeping, tax preparation, and CFO advisory firm serving small businesses across RI and southern Massachusetts since 2019. Headquartered in Woonsocket, RI, we work with contractors and tradespeople, healthcare practices, and professional services firms throughout the region.
If cash flow is the part giving you the most trouble right now, start with our free 13-week cash flow forecast template. To understand what ongoing CFO support looks like, see our CFO advisory services.
by