6 Metrics to Gauge Business Success
Sometimes, a business’ most telling numbers business aren’t on the monthly reports. Although the foundation of business finance revolves around the balance sheet and income statement, there are a few numbers that, when known and tracked, can make a huge impact on business decision-making. Here are six helpful metrics:
1. Revenue per employee
Even for businesses with employee counts in the single digits, revenue per employee can be an interesting number. It’s easy to compute: take total revenue for the year and divide by the number of employees during the year. It may be necessary to massage the employee count to adjust for turnover or part-time employees.
Whether the result is good or bad depends on the industry as well as a host of other factors. Compare it to prior years; is the number increasing (good) or decreasing (not so good)? If it’s decreasing, find out why. Perhaps many new employees who need training caused productivity to slip. Or perhaps the company increased capacity and has yet to realize the revenue.
2. Customer acquisition cost (CAC)
The judges on Shark Tank® look at CAC is one of the most important numbers for investors. This is how much it costs in marketing and selling costs to acquire a new client. Factors such as annual revenue, or even lifetime value of a client will affect how low or high is acceptable for the number. Regardless, the cost relates to profitability.
3. Profit margin
Selling at low margin and ‘making it up in volume’ doesn’t always work. Measure and track profit margin by product or service to understand profitability and where to increase or decrease effort or emphasis. For example, dropping marginally profitable services may create a boost in overall profitability because the labor may be re-assigned to higher margin services. Before making dramatic changes, consider how important the product or service is to customers or how it inter-relates with other products or services.
4. Cash burn rate
How fast does the company go through cash? The cash burn rate calculates the difference between starting and ending cash balances and divides that number by the number of months it covers. The result is a monthly value. This is especially important for startups that have not shown a profit yet so they can figure out how much cash they need to borrow or raise to fund their venture. Cash burn is related to cash flow, which was covered in the August 2016 newsletter.
5. Revenue per client
Revenue per client is a good measure to compare from year to year. Are clients spending more or less, on average, than last year? Defining this metric allows businesses to take action to win back declining or lost clients, and recognize clients that increase business. It also is a huge factor in forecasting growth and budgeting for increased staff.
6. Customer retention
Don’t just be curious about how many customers return year after year; compute the client retention percentage. Make a list of last year’s paying customers. Then create the same list of for the current year. (It takes two full years to be accurate). Merge the two lists and count how many customers there were in the first year. Then count the customers who paid money in both years. The formula is:
Number of customers who paid in both years / Number of customers in the first or prior year * 100 = Customer retention rate as a percentage
New customers don’t count in this formula. The goal is to see what percentage of customers came back in a year. Modify the formula to measure any length of time.
Examine the relevant metrics to gain richer financial information about business performance. It’s more than just measuring numbers. Paying attention to the metrics and celebrating success may open up new opportunities and is good for employee morale. And as always, if we can help, be sure to reach out.