Quote of the Month:
Reports give you visibility, but metrics give you the power to excel.
Tax Tip of the Month
Starting September 30, 2025, the IRS will phase out paper refund checks under Executive Order 14247. Refunds will be issued electronically—by direct deposit, prepaid debit card, or digital wallet—making them safer, faster, and more efficient.
If you still receive paper checks, set up a bank account or electronic option now to be ready.
Read more >
Essential Reads
Businesses lose millions due to fake invoices. They don’t come with flashing red lights. They come through your inbox, looking just real enough to slip through. Discover 3 ways to spot a fraudulent invoice before it drains your profit in the full article.
Your Breakaway Growth Navigator
We’re continuing our series on building a strong financial foundation for your business. Last month, we showed you how to “Know Your Numbers” and navigate the trifecta of financial reports.
This month, we’re taking those reports a step further by helping you understand what those numbers mean—and which ones actually matter.
Because looking at your P&L is one thing. Knowing what to do with it? That’s where growth begins.
Let’s turn raw data into action. Here are the six most important KPIs we help clients track—and what they tell you about the health of your business:
#1 Gross Profit Margin
This is a leading indicator of sustainability. It shows how efficiently your business operates at its core. Low gross margin = vulnerability to rising costs.
Formula: (Revenue – COGS) ÷ Revenue
Benchmarks:
- Service businesses: 50%–80%
- Product businesses: 25%–50%
Ranges vary by industry and how you categorize direct labor. What's more important is knowing your margin—and improving it over time.
Example: Two companies both make $5M. One has a 70% gross margin, the other has 30%. The first keeps far more of every dollar—and is more resilient and valuable long-term.
Warning Signs:
- Low or shrinking gross margin
- Rising delivery costs
- Overstaffed fulfillment or inefficient production
Levers to Improve:
- Raise prices
- Streamline delivery
- Reduce labor inefficiencies
- Eliminate low-margin services/products
#2 Net Profit Margin
What’s left after all expenses—your true bottom line. Net profit shows how much your business keeps. It’s the number most tied to overall financial health.
Formula: Net Profit ÷ Revenue
Benchmarks:
- Small businesses: 10%–20%
- High-performing service businesses: 20%+
Warning Signs:
- You’re profitable on paper, but cash is tight
- Expenses are creeping up faster than revenue
Expect this number to dip temporarily during rapid growth, but monitor closely.
Levers to Improve:
- Raise prices
- Cut unnecessary expenses
- Outsource admin and back office functions
- Renegotiate contracts
- Pre-capture revenue
Too-high net margins can be a red flag, too. Often it means the owner is underpaid or overworked (or both!).
#3 Owner's Compensation
The total amount you’re paid, including salary, distributions, draws, and benefits. You didn’t start your business to be the lowest-paid person in it. A healthy business pays its owner and turns a profit.
Benchmarks:
- Early-stage: 50%–60% of net income
- Scaling: 30%–50%
Warning Signs:
- Your effective hourly rate is lower than an employee’s
- You couldn’t afford to replace yourself
If your business only looks profitable because you’re underpaying yourself, it’s not truly profitable.
#4 Revenue Per Employee (or Contractor)
Total revenue divided by your total team (including yourself). It measures productivity and efficiency per person on payroll.
Benchmarks:
- Service businesses: 2.5x to 4x salary
- Product businesses: 4x to 6x salary
Warning Signs:
- Headcount is growing, but revenue isn’t
- You’re not getting ROI on team investments
Levers to Improve:
- Increase efficiency
- Automate repetitive tasks
- Raise prices or improve upsells
- Optimize team structure
Include yourself in the headcount. Rule of thumb: if you had to hire someone to replace you, they’d count.
#5 Operating Expense Ratio
Operating expenses (excluding COGS) divided by revenue. It shows how much of your income is eaten up by overhead. High OpEx = less profit to reinvest or take home.
Benchmarks:
- Service-based businesses: 20%–35%
- Product-based businesses: 15%–25%
Warning Signs:
- You're spending more but not seeing growth
- You’re under-investing in key areas (like marketing or technology)
If OpEx is too high:
- Audit your subscriptions
- Rebid contracts
- Cut low-ROI expenses
If OpEx is too low:
- You may be under-investing in growth, team, or tech
Every dollar you cut here goes straight to your bottom line, but don’t starve future growth by cutting expenses that contribute directly or indirectly to growth and culture.
#6 Cash Runway
How many months could you operate with no revenue? This is your financial breathing room. Without it, one unexpected event can cause chaos.
Benchmarks:
- Minimum: 1 month
- Ideal: 3–6 months
- Scaling or seasonal? Aim for 6+ months
Warning Signs:
- You’re relying on credit to make payroll
- No reserve for taxes, slow months, or surprises
Levers to Improve:
- Build reserves from monthly profit
- Set up a line of credit before you need it
- Invoice faster and follow up on A/R like a dog waiting for its next meal
Profit is theory. Cash is reality.
Next month: Cash Is King - we’ll show you how to forecast and manage your cash, so you can make bold decisions without fear.
Client Story of the Month
IRS Innocent Spouse Claim
One of our clients came to us four years after a divorce, still being held responsible by the IRS for over $115,000 in taxes tied to her ex-husband’s business. For two years, our Tax Resolution team worked persistently on her behalf, navigating the complex IRS Innocent Spouse Relief process.
The result? She was officially deemed an Innocent Spouse. The IRS released her from liability for the $115,000, shifting the burden back where it belonged—her ex-husband.
Who do you know that needs our services?
We're accepting new clients for...
1. Proactive accounting, tax & advisory
2. Tax resolution
3. Forensic accounting and fraud investigations
Who do you know that needs our services? Let us know--we're happy to help!
A Question for You
Which of the six KPIs mentioned above would make the biggest difference in your business if you improved it by just 10%?
Until next month,
Your Red Bike Advisors Team
About Red Bike Advisors
We're on a mission to equip small business owners with finance and tax insights that create exponential value for their companies, customers, employees, and families. From compliance to advisory, we take the confusion and scramble out of business finance and tax strategy and bring in clarity, growth, and peace of mind.
You are receiving this monthly update as a friend or client of Red Bike Advisors LLC. You may unsubscribe at any time. |