If you want your business to make money, then there are 3 critical areas to measure; your net profit, return on investment and cash flow. And to make money you must increase each of these at the same time.
1. Your net profit is what remains after deducting all the expenses you incur in running your business from the sales you make to your customers. But you cannot manage net profit. You can only manage those elements that make up net profit.
2. Your return on investment is the net profit return you receive expressed as a percentage of the assets you have tied up in your business. This is an extremely important measure; if the rate of increase in the assets is greater than the rate of growth in your net profit your business will eventually fail. This is regardless of the amount of profit your business is generating.
And this is because the additional assets your business needs, over and above the net profit retained in your business, will need additional debt or capital.
3. And of course, your cash flow is the cash that flows into and out of your business. Cash flows into your business from, for example, cash sales, customers that owe you money, borrowings, and the sale of equipment. Cash flows out of your business to pay for operating expenses, salaries, the purchase of equipment, repaying loans, tax and paying the business owners.
