Most small business owners know to track their companies’ fundamental financial data, such as revenue, profit and expenses. But they’re often blind to the metrics that separate a sustainable, valuable business from one that could be missing opportunities or, worse yet, quietly at risk.
Capturing, monitoring and adjusting based on detailed financial data is one of the most critical elements to success. These are some of the common financial blind spots we see with founder-led companies, and how to fix them:
Gross margins: Steady profits can mask eroding margins. Track gross margin as a percentage of revenue each month, breaking it down as specifically as possible. Be wary of gross margin declines, which could signal trouble. You might need to raise prices to account for higher expenses. Your customer mix could mean you’re over-servicing low-margin customers. It could be a minor blip, but tracking just this metric is often telling about a whether a business is moving in the right direction.
Customer mix matters: Your business might be thriving, but if it relies on a handful of customers for most revenue, you’re one phone call from struggling. Look at your top 10 customers as a percentage of total revenue because overreliance on top customers is an existential risk. If you face this issue, it means you must diversify.
Similarly, you may have an unprofitable customer segment without realizing it. Look at the true cost to serve each type of customer, including the costs to acquire, deliver and support. Don’t subsidize unprofitable segments. Either fix the cost problems or move on from unprofitable customers.
Working capital: Many small businesses are cash poor even if they’re profitable. That’s because of gaps between how long it takes to collect payments from clients, how much inventory you have and how you are making payments. If you collect in 45 days while paying suppliers in 30, you’re missing out on working capital that could fuel growth. Great companies focus on the cash conversion cycle, closing the gap between when you pay suppliers versus when you collect from customers. Tightening accounts payable and receivable can unlock cash without raising prices or cutting costs. And slow paying customers are not always at fault. Look at your invoices and confirm how timely they are issued, how much information they provide and make sure they are accurate. Don’t give your customers a reason to slow pay you.
EBITDA quality: Separate recurring, maintainable EBITDA from one-time gains and other earnings that might not continue. This is the true economic profit of your business — and it’s often lower than the headline number.
Key person dependency: Determine how much of your profit depends on the owner’s direct effort or relationships. Even if you’re not planning succession (and you should) it directly impacts valuation. A business where the owner is essential is worth far less than one where systems, team and processes drive results.
Churn and retention: Measure what percentage of customers you retain year-over-year and what percentage you lose. High churn means you’re spending time and energy to tread water. A low churn rate suggest real, profitable growth is much more likely.
Pricing: If it’s been more than a year since you raised prices, you might be falling behind. Great companies should have some pricing power. If you’re scared to raise prices, it suggests a lot about the perceived value of your offering and your competitive position. ●
Stewart Kohl is Co-CEO of The Riverside Company
