There’s a lot of talk about this these days, and for good reason. I’m looking now at focusing on the fundamentals. One of the single most important of the good business fundamentals is planning, particularly the kind of planning that includes careful review of plan vs. actual results, and course corrections. I call that steering.
- Watch your burn rate. That’s your spending. Add up your operating expenses (rent, payroll, marketing expenses, and so on) and subtract the extra spending you don’t need to do.
- Watch your gross margin: That’s sales less direct costs. While your percent of gross margin is an important measure of profitability, it’s the actual amount of gross margin that you’re watching now.
- Unless you get all your money for sales immediately, or from credit cards, then pay close attention to your accounts receivable. That’s the money customers owe you after you deliver the goods or services and give them an invoice to be paid later. Those usually say 30 days, but, as times get tough, good luck with that. Collection days are a measure of the average wait to get paid. It’s supposed to be 30, but it’s usually about 45, and we can expect it to go up.
- Watch the relationship between burn rate and gross margin. If your gross margin is lower than your burn rate, then you’re in trouble. You’re building deficits. Unless you’re the United States government, that’s dangerous. You are eating up your capital.