Businesses always strive to make profit. But there are certain key risk metrics that need to be addressed in order to succeed. In this article, we will go over some of the major risk metrics that any company should be aware of, especially if that company is a startup one.
5 Risk Metrics to Always Monitor
First and foremost: compliance. A company should have compliance departments that review results of internal audits and regulatory examinations. This is important, of course, because they can identify potential patterns of compliance concerns.
Direct Costs Concerns
Then, of course, there are direct costs. They can offer you insights about what costs you incur whenever you sell a product. Products cost to either be made or bought. As such, this type of risk metric will show you how to approach your business decisions.
Operating Margins Concerns
Included in the key risk metrics category are the operating margins. They are earnings that display the percentage of total sales or revenues. Taking into account this type of metric will let you compare your business to competitor’s businesses. This, in turn, will allow you to see how you’re performing before making a decision that, otherwise, could prove costly.
Here’s how: Company A has sales of $3m for the previous year and profits worth of $25k. Now, Company B, in the same conditions, had a profit of $2m and profits worth of $20k. In terms of profit comparison, Company A has a great profit sum; but looking at profit margins (or “profits generated from each dollar of sales”), Company B has a bigger profit margin than Company A.
Cash Burn Rate Concerns
If you’re a startup company, then this is one of the core risk metrics that you should never lose sight of. The cash burn rate is the rate at which you burn through the funds in order to create profit. In other words, if you’re not able to make profit fast enough, you will use your money deposit before you can make any sustainable profit.
One tip here would be to either increase the price of the service or good that you’re selling in order to make profit. This will allow you to build a positive cash flow before you run out of money. If you won’t be able to pay attention to this key metric, you will burn the money fast. And you will run into trouble.
Cash Flow Concerns
Cash flow is the result of deducting from the cash you receive the cash you pay out. For example: if you pay $5k worth of bills and you receive $8k worth of payment from your clients, your cash flow will be $3k. If it were to be the other way around, it would be really bad. Because, by applying the same logic, you would be missing $3k worth of money. And that’s something.
Without these essential risk metrics, you won’t be able to make accurate business decisions. Not knowing how much money goes in and out of your bank accounts in a specific time frame, you won’t be able to buy new assets, expand your company’s line of products and so on. Or not paying attention to your operating margins or cash burn rate, your movement options and decisions would be limited & even paralyzed.
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