Just narrow it down to the most essential metrics that will help you to understand (0:04) how your company is performing from a financial and operational perspective. (0:10)

This podcast business strategy is about the lessons I learned while building (0:13) coltivar.com and turning around and growing million and billion dollar companies. (0:17) My hope is that you use these strategies to grow your business and someday soon (0:21) partner with us to build a more profitable and iconic company. Please share and enjoy. (0:28)

One of the biggest risks in business is not having data. If you're running a company and (0:33) you don't know your numbers, you're essentially just guessing. So today I'm going to walk you (0:37) through the five metrics you should know in your business to help you to make more informed (0:42) strategic decisions that ultimately drive greater value.

My name is Steve Coughran and (0:47) I'm the founder of Coltivar. I've spent the last 15 years of my life growing and turning (0:51) around businesses. And trust me, when I first started out, I had no clue how to read financial (0:56) statements. I had no metrics in place for my business. And guess what? I made a ton (1:01) of mistakes and left a lot of money on the table and I don't want this to happen to you. (1:05)

So let's go ahead and jump in to the first thing you should know in your business, (1:08) which is your margin. Now, there are two areas for measurement when it comes to this metric. (1:15)

Number one is your gross margin. Gross margin is the same thing as gross profit, (1:19) and it can be found by taking your revenue on your income statement and subtracting (1:24) your cost of goods sold. In other words, revenue represents the top line, all the income that you (1:29) generate in your company by selling your products and services to customers. And then your cost of (1:35) goods sold include all the costs associated with fulfilling that product or service to the end user. (1:42)

So if you take your revenue minus your cost of goods sold, you arrive at gross profit. (1:47) The reason why this margin number is important because it will help you to understand whether (1:52) or not you are appropriately pricing your products and services and whether your fulfillment costs (1:58) are in line with that pricing. Also, if you calculate your margin and it's lagging, (2:02) you may have a volume problem as well.

But this is a really important metric to start with, (2:08) and it's pretty easy to find if you just go to the income statement. (2:11)

The next margin metric comes from operating margin, and this can be found by taking your (2:16) gross margin or your gross profit and subtracting out your operating expenses. In other words, (2:21) your overhead expenses, all the costs associated with running your business, (2:25) your general and administrative payroll, professional fees, insurance, sales and marketing costs, (2:32) travel, meals, entertainment, etc.

All the selling general and administrative costs are in your (2:37) business. Just subtract those from your gross margin or your gross profit, and you'll arrive (2:42) at your operating profit. This will tell you whether or not your company is earning a sufficient (2:47) operating margin after accounting for all the costs.

So that's metric number one. You should (2:52) know it really well, like the back of your hand, and everybody else on your team should (2:56) definitely understand what the margins are as well in your business.

Metric number two is throughput. (3:03)

Throughput is a critical measure, and I've talked about this before on my podcast and in other (3:08) videos, but you can earn all the margin in the world, but if you don't recover it fast enough, (3:13) you can still go bust. So I've worked with companies before who've come to me like, (3:18) Steve, we're making money on all of our jobs. Our margins are sufficient as a percentage of revenue, (3:23) but we're not making money.

And I'm like, yes, you're right. You have margin, but you're not (3:28) recovering it quick enough in order to cover your overhead. And that's why you have losses and cash (3:34) flow issues.

So throughput is just some measure, some financial metric expressed as a function of (3:42) time. In other words, you could take revenue divided by labor hours, or you could have revenue (3:47) per week or revenue per month. Better yet, you have some measurement of margin as a function of (3:53) time.

So you have gross margin per hour or gross margin per week or gross margin per month, (3:58) or operating margin or operating profit per hour, etc. The idea is in the denominator, (4:05) you have time as an element.

So when I was the CFO of a large construction company, (4:09) before I went in there to help them turn it around, they were exploring their market focus (4:14) and position, and they were evaluating these different segments based on the percentage of fee (4:19) that they were able to charge by managing these jobs.

So they would look at a vertical like data centers or healthcare, and they're like, wow, look at the margin is so much higher on these projects compared to retail or education. But what they weren't accounting for was the throughput. (4:36)

So yes, the margin was higher, but the timeline required to complete these jobs were extended because in healthcare, the punch lists are really long. There's a lot of setup, mobilization. (4:47)

There's just a lot more detail that goes into building a hospital or adding on an operating room compared to a retail outlet where developers want to get in. They want to finish these stores, so they get tenants in and they get them up and running. (4:57)

So the timeline to recover that margin was much longer. Let me just say this another way. If I offered you a job and said, look, I'll pay you $250,000, you're like, wow, that's great. (5:08)

Yes, I'm in. But then I say, oh, by the way, it's over a five-year timeframe. Well, that may change your decision. (5:13)

So time has an important function when it comes to running a business and understanding throughput will help you to understand your business so much better. (5:20)

Next, the third metric is LTGP to CAC, which stands for the lifetime gross profit of a customer compared to the customer acquisition cost or the cost to acquire a new customer. (5:32)

This is a ratio, and I recommend at least a three to one ratio when it comes to your LTGP to CAC. This will tell you how efficient your sales and marketing function is in acquiring customers at a profitable margin, which will sustain the business. (5:46)

So make sure you understand this metric really well, and you can start by going to your income statement. You could evaluate the gross profit. (5:58)

We talked about that at the very beginning, the gross margin that you generate from customers. Divide that by the number of customers, and you'll figure out the lifetime gross profit per customer. (6:03)

If you don't know how long your customers stick around the lifetime, right, that first part, then you just take the gross profit for a customer in one year, right, just to be conservative. (6:18)

If one year is too conservative because customers stick around for longer, then you could go to two years or three years, but figuring out the lifetime of your customers and the churn of your customers will help you to tighten up this calculation. (6:28)

But like I said, if you just want to get started, just start with one year. The amount of gross profit you earn per customer in one year, use that as your LTGP, and then your customer acquisition costs can be found by going to your income statement and adding up all the costs associated with acquiring a new customer. (6:37)

This may include salaries for business development or sales roles, commissions, bonuses, sales and marketing spend, everything that you spend in order to acquire a new customer. (6:57)

Just take all those costs and divide it by the number of customers that you acquired in a given timeframe, and it'll give you this calculation. So that's LTGP to CAC. (7:04)

And that's ratio number three. Moving on to number four is return on invested capital. (7:15)

So essentially how to calculate this, you take your net operating profit after tax and you divide it by your invested capital in the business. (7:21)

Invested capital is made up of two parts. First, you have working capital. That's the difference between your current assets and your current liabilities and your net property, plant and equipment. (7:34)

You can find both of these items on your balance sheet. The reason why it's important to understand the return on your invested capital is because you have money tied up in the business, on the balance sheet, in working capital, in your trucks and trailers and machinery and your building, et cetera, all the fixed assets that you have to run your business. (7:46)

And that's the base, right? That's the base of money, the lump sum of money that you have invested in your company. (8:05)

So if you're just evaluating the financial performance of your company by going to the income statement and looking at your operating profit, your operating margin that we talked about at the very beginning, then you may be tricked because let's just say one company is earning a million dollars in bottom line profit, in operating profit, and another company is earning five million dollars in operating profit. (8:10)

Which one is operating more efficiently? Which one has better financial performance? You may be tempted to think that the company earning five million dollars in operating profit has way better financial performance. (8:27)

But what if I told you that that company required a hundred million dollars in invested capital to buy machines and equipment and a factory and all this stuff in order to produce five million dollars, whereas the company making a million dollars in profit only required a hundred thousand dollars in invested capital. (8:48)

Would that change your mind? Yes, it would, right? Because some companies are so capital intensive and you have to understand that ratio. (9:04)

Now for some businesses, return on invested capital doesn't always work, especially if you're asset light, like you're in professional services or maybe you're a technology company. And in these situations you can use economic profit instead as an alternative, right? (9:09)

But that's metric number four. And metric number five, this is my favorite metric of all and it trumps everything else. It's free cash flow. (9:25)

Free cash flow is the lifeblood of the business and it's the amount of cash leftover at the end of the day that's available to either one, pay off debt, number two, return to equity providers through distributions or dividends, or three, to reinvest back into the business. (9:32)

It can be calculated by going to the statement of cash flows, finding cash from operating activities and subtracting out your investments in capital expenditures. (9:50)

In other words, your investments in trucks, trailers, machinery, buildings, et cetera, to run the business. Those are the five main metrics that I pay attention to when turning around or growing a business. (10:02)

There are many more, you can go more macro, you can go more micro. The point of all of this is to know your numbers and to have a starting point. (10:07)

So if you don't know your numbers at all, at least put in place these five and then you could build from there. (10:17)

But I would also say, be careful not to have too many metrics. That's a temptation for some leaders to have a big dashboard where they have like 50 metrics. And I could tell you, it just creates a lot of confusion. (10:26)

So instead, just narrow it down to the most essential metrics that will help you to understand how your company is performing from a financial and operational perspective. (10:35)

If you need help with any of this in your business and you want to know your numbers better and tighten up your data, you could always reach out at coltivar.com. And if you got value out of this, please be sure to share. That would mean the world to me. (10:44)

And until next time, take care of yourself. Cheers. (10:50)