“How is your business doing?” when asked this question some entrepreneurs may say “OK” but not truly know the facts and figures of how their business is doing. By keeping track of metrics that relate to your business goals, you can measure and clearly see if your efforts are working or where you need to make adjustments. Here are six metrics to measure to know the health of your business.
Metric #1: Cash flow forecast
This metric helps you estimate how much cash you potentially have at a given time in the future. Depending on how long you have been in business you will be able to do the forecast for a longer period of time. If you are a new business, you may only be able to forecast a week or month ahead of time but this will change as your business grows. To do a cash flow forecast, you need to first add up all the income (money in the bank) you will make in the week or month you are forecasting. This could be accounts payable, and cash. Then you need to calculate the money which you are spending (your expenses) for the week or month you are looking at. The expenses could be rent, salaries, suppliers, water and electricity, or marketing costs. When you have these two amounts you will take the expense away from the income.
Income – expenses = cash flow forecast
If the total is positive then you could use the money to save or invest in your business and if the total is negative, you need to see how you can get more money into your company. This might be by increasing sales, cutting down on expenses or getting a loan. If you have a few negative weeks or months, you will need to reassess your business and see how you can improve your offering so that you will create a positive cash flow forecast for your business.
Metric #2: Sales growth
Here you will measure how your sales are progressing over a specific period of time. This can be weekly, or monthly. After a while, you can compare your sales with your previous week, month or quarter. You track this metric by looking at the number of sales you make in the time period you wish to measure. By tracking this information, you can create sales targets that are in line with the trend you see over the time you are measuring. This metric helps you to see how your business is doing overall and it can help you to see if your sales are seasonal or if a change in prices or product has caused a dip or rise in sales. If you see a rise, then you can increase these positive efforts and if you see a dip then you can try to rectify what caused it.
Metric #3: Sales per lead source
You have invested quite heavily in your marketing but are you getting the returns you need? By evaluating how many sales you make through the different marketing channels you use, you can see where you need to increase your efforts and where you need to decrease your efforts.
Metric #4: Gross margin
Wondering how efficient your business is? Then gross margin is the metric for you. This metric will help you see how productive your business is and will help to highlight which process needs to be improved.
You can find out your gross margin by looking at the calculation below.
Gross margin = (total sales revenue – total cost of goods)/ total sales revenue
Metric #5: Customer acquisition cost
Do you know how much you are spending on getting customers through your door? By calculating your customer acquisition cost (CAC) you can then review it against your customer’s lifetime value and see if it is worth your efforts to keep the customer or not.
The calculation for CAC is:
CAC = total spend for acquiring a customer (marketing expenses and business lunches or dinners) / the number of customers you got during the period you are evaluating.
Metric #6: Customer’s lifetime value
A customer’s lifetime value (CLV) is used to measure how much income you will receive from a customer. This might be from a once-off sale or repeated sales. This metric is affected by customer service. When you review this value against your customer acquisition cost and your CLV is higher than your CAC then you have a good fit. If it is less than then your CAC, you may need to reassess if the customer is worth having.
An easy way to calculate CLV is by adding up all the revenue you made from your customer and taking away the CAC. You can learn more about CLV by reviewing this infographic on Neil Patel’s website.
By going through these metrics you will have a good data-backed idea of where your business is going and what changes you may need to make.