The purpose of benchmarking your financial performance is to find opportunities to improve your profitability and cash flow.
The process of benchmarking is to compare your results on certain key performance measures against your past results and/or the results of other companies like yours so you can identify opportunities for improvement.
The big question is which metrics should you benchmark. Which metrics really matter and which ones, if you are successful in improving them, will make a meaningful impact in your quest to improve your profitability and cash flow.
Because I am a big fan of simplification, and sometimes getting started is half the battle when trying something new, I have three metrics that I believe really matter in business.
They impact both profitability and cash flow. They are:
- Gross Margin
- DSO (Days Sales Outstanding)
- Capital Expenditures
I wrote a short article for the resource center at the Business Bank of Texas where I talk about the value of benchmarking yourself on these three metrics.
I included five key questions about each metric that I believe will get you thinking about how you are doing on each of these three measures.
Improving just one of them over the next three months could go a long way toward achieving your goal of improving your profitability and cash flow.
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