Small business owners are really good at conceptualizing an idea and marketing it. However, when it comes to tracking certain metrics, they only know what they know. So that leaves what they don’t know not getting tracked. It is what they don’t know, that can often be a detriment to their business that they will never see coming.
There are certain metrics that the majority of business owners track. Revenue, expenses, and sales are something all small business owners typically measure from the start. Depending on the industry you are in, there are probably some standard ones you know of for your industry.
For example, if you are in the trade industry, you most likely measure your cost of goods ratio. If you are in a service-based business, you most likely track returning customers from year to year.
These are all common, but to take your business to the next level, you need to enforce a level of discipline and data tracking that you have never done. And this means measuring things you have never measured before and maybe never thought of as being data you need to measure. In business, these data points are known as metrics.
Here is a list of the top 8 metrics that big businesses measure and track diligently, and I think if more small businesses would do the same, they would exceed their expectations of their business revenues and profits.
Customer Acquisition Cost
The cost of attaining a new customer is said to be five times as much as keeping a current customer. Therefore, knowing how much it costs you to get a new customer in the door (literally or figuratively) and pulling out their credit card is a top metric to know. If you don’t know this number, it is impossible to know at what point that the customer becomes profitable for you. Knowing when a customer becomes profitable for you can help make lots of decisions in your business.
The acquisition cost of a new customer includes all marketing and sales costs associated with gaining new customers. Take this number over a specified period of time and divide it by the total number of new customers in that same period of time and you will have your average customer acquisition cost.
You should compare this to industry averages for your industry and should also track this over time to verify that your acquisition cost is going down. Over time as your business brand and reputation grow, the cost of gaining new customers should decrease.
This ultimately is a tell of whether your return on investment for your marketing and sales costs is paying off.
What this really means is simply measuring the productivity and profitability of your staff. If you don’t know this, you can’t really know what is going on in your business. Productivity ratios are easily applied to most aspects of your business. Sales productivity, for example, is taking your actual revenue and dividing it by the number of salespeople you have on staff. This can also be compared to industry averages by using industry statistics. Beyond checking industry averages, tracking this over time will also allow you to gauge your businesses improvement on this. It should be increasing over time. You can use this same method to calculate marketing productivity, support productivity or any area of your business.
Labor Hours per process
Labor costs can quickly add up and are often a businesses largest overhead cost they have. Being able to track your labor hours and tie that into the cost to produce the end service you provide is important.
This data can help you determine if you are getting the expected level of productivity from a team or department and even drill that down to each individual employee and their part in the process. Being able to compare an employee overtime and ensure that they are improving is also important. You should not see their productivity decrease when running this data, but it should be increasing, even if only slightly, ongoing. If it is decreasing, it is a red flag that either they are not putting in the effort they use to, or a new process or system may have slowed them down and some additional training may be needed.
Beyond this, in today’s day and age, many of the tasks employees start out doing can eventually be automated. This automation will allow them to be more productive in the areas that are unable to be automated. Knowing your labor costs associated with a potentially automated task can help you determine when is the right time to pull the trigger and spend the money to automate because you will know at what point you will break even on that investment based on labor costs associated with your data.
Missed sales opportunities
Many businesses track the sales coming in the door but very few track the ones that aren’t.
Now before you get ahead of yourself, let me clarify what I am talking about here. This is not simply that potential customer that didn’t buy. I am talking about the customers you already have that are going to another business for a service you offer that they were not aware of. This is a missed sale opportunity.
Tracking your client’s spending habits and lifetime value to you as a customer can help you see where and when they are spending money with you and can allow you to see where they are not. Look at your offerings and see if there is something that compliments what they already pay you for and upsell (I hate that word by the way) – offer them something they either need or will benefit them and now you just increased the lifetime value of that customer.
Tracking this type of data can be done in your CRM more than likely. Take some time to see what you already have that can pull a report for this purpose.
The profitability of each service
Your best-selling service may not be your most profitable.
Read that again.
It is true! Just because it is the thing most people pay you for, does not mean it is your most profitable. Often when I am working with a client who says they are bringing in the anticipated revenue, but the profit margins are not what they anticipated, it is often this that I find to be the culprit. You need to evaluate every single service offering you have and run the numbers to ensure your profit has been built into the pricing.
For some, this may mean cutting a service altogether. For others, this may mean restructuring your pricing of a service. Whatever that looks like for you, take some time to ensure that every service you offer is profitable. If not, fix it!
This data will change over time as well. The labor to provide it, the overhead costs, the software, etc. – it will all change, so this is not a set it and forget it profitability metric. This is a review of this annually metric. The cost of living increases year over year- for the most part- your services should as well.
ROI- Return on Investment
Networking has an ROI but very few people track it.
If you are spending $500 / year to join a networking group and then spending $20/ week for a meal at said group, you have some direct financial costs that can be traced back to this. However, what about your time? The time you spend traveling to and from the event. The one-on-one meetings you spend time with. The other events for other members that you attend to support their business. This is all time taken away from your business. You need to know what you charge hourly for your services and factor this in as part of the indirect costs of networking.
Once you know both numbers, you know what your investment is. Now, you need to track the revenue coming in from this group and divide it by the costs to see what your ROI is for the group. This number will most likely start out in the negative and grow from there. But after a year or so in the group you should see a positive impact from the networking where you are making a significant amount more from the group than you are spending (dollars and time) to attend and be an active member.
Return on Invested Time
Time is money people!
How many times have we all heard that? Well in business, it can be true. What you spend time on should result in increased revenues in your business, as it should for your employees.
Most business owners do not track the amount of time they spend on things during their day and before they know it, the day is gone, and they don’t feel like they accomplished what they thought they were going to.
By tracking what you spend time on, you can start to see where the ROIT is not lining up. This helps you to determine what to delegate and to whom on your team to delegate it to. When you delegate to an employee that costs you less per hour than what your billable rate is, you are saving money when you turn the time you were spending on that activity to IPA’s (Income Producing Activities). Once you have mastered this with yourself and delegated out, it might be time to have your employees do the same. Higher paid employees can delegate some of their tasks to lower-paid employees. Lower paid employees can delegate, and it can be outsourced to a contractor. Everyone should spend time in their genius zone- where they are the most benefit to the business – and everything else should be delegated to someone else. Every task in business has someone that is a genius at it- find them and utilize them- they will do it quickly and it, therefore, costs you less increasing your ROIT for the entire staff.
Cash flow over profits ALWAYS!
Yes, I said it, I say it all the time.
A business that does not profit can sustain for years with proper cash flow management.
A business that profits but does not manage cash flow will crash overnight.
If you use QuickBooks, they have a great, yet underutilized tool, the Cash Flow Report. There are things you spend money on and money that comes into your business that may not hit the profit and loss report, so this can be misleading if it is the only report you are relying on.
The Cash Flow Report can tell you exactly what is going out of and what is coming into your business even though it may not have an impact on the profitability. Maintaining positive cash flow in business is crucial to success. Having cash flow means you have money on hand for your business. This means that you can cover your expenses and not worry about it a check doesn’t come in to cover them.
You should have an ongoing pulse on your cash flow. It is my recommendation that you do not take distributions or invest through your business until you have a positive cash flow that allows you to know you can make it through a rough patch if it occurs. For some businesses this is 6 months’ worth of expenses- for others, it is 3- this is up to you but having the positive cash flow to rely on has saved many businesses in the past.
Setting up data tracking in your business can be a time consuming and daunting process but should not be overlooked or ignored. If you need some help setting up some data tracking systems in your business, I would be happy to talk to you and see if your business is a good fit for our services to assist with this. You can schedule an appointment or reach out to me at 303-847-0836.