Today, I want to talk about knowing your business numbers and financials.
The numbers don’t lie. As a small business owner, there are a select group of key metrics that you should track in your business every month. These “numbers” give you a reality check toward the growth and health of your business.
For the purpose of this article, I want to keep it short and simple, so you aren’t overwhelmed with hundreds of different things to track. Instead, I’m going to share the 7 most important small business key metrics that I know of.
These might vary slightly by industry, but this is a good starting point for any small business owner, including network marketers.
The metrics are:
- Customer Acquisition Costs
- Lifetime Value of a Customer
- Retention Rate
- Gross Margin
- Net Worth
We will cover more on each topic in greater detail below.
# 1 Customer Acquisition Costs
You need to know how much it costs you to acquire a new customer for your business. For example, if you spend $500 on advertising and get 20 new customers from it, your Customer Acquisition Cost would be $25 per customer. Your goal is to find as many forms of advertising as you can that have a reasonable Customer Acquisition Cost.
Just become some methods cost more than others doesn’t mean you should ditch those methods. As long as you can acquire a customer at a reasonable price and can still make a profit, keep using it. Besides, it’s much better to have SEVERAL different methods of acquiring customers, rather than just rely on one method. Never have all of your eggs in one basket.
The only way you can determine your Customer Acquisition Cost is to track your advertising. You need to use tracking codes and track each advertising venue closely so you can ditch the losers and focus on what works. When people visit your business or make a purchase from your website, ask them how they learned about you. Start doing this and never stop. Make it a goal to find several effective ways to acquire customers.
# 2 Life Time Value of a Customer
Never think of your customers as a one-time transaction. Instead, think about how much a customer is worth to your business over a period of time. You might discover that you don’t make any profit from the first transaction with your new customer, but if you treat them well, follow up regularly and provide good customer service, they might just keep coming back to your business to buy more!
You need to determine the life-time value of a customer for your business. For example, if you own a restaurant and your average customer spends $20 per meal and visits your restaurant once a month for a two year period, your life-time value of the customer is $480 ($20 x 12 x 2).
This will vary based upon what you are selling and your buying cycle, but it’s important to know. You need to survey your customers to get this information and monitor your receipts closely. Always look for ways to increase the lifetime value of a customer by offering additional products and services, following up more often, and providing exceptional customer service.
Let me give you an example from my business to put this in perspective. I sell a lot of eBooks to military personnel. My eBooks range in price from about $10 to $60. In most cases, it costs me about $22 to acquire a new customer via paid advertising. Many of these customers purchase a $10 or $20 eBook as their first purchase. Up front, I lose money on these customers. HOWEVER, nearly 8 out of every 10 people who buy one eBook end up buying MULTIPLE products.
My average customer is worth about $70 to me over the course of a life-time (customers stay with me about two years on average). Therefore, I will gladly spend $22 to earn that type of revenue per customer, since I have high profit margins on my products.
Do you get the point of what I am talking about? I hope so. You need to know these numbers in your own business, so you can justify how much a customer is worth to you and how much you can afford to spend to acquire a new customer.
# 3 Retention Rate
Any business can get someone to do business with them one time. But the sign of a good business is one that can get repeat business. You need to remember that it’s much more expensive to try to sell a product or service to someone you’ve never done business with before than it is to sell a new product to an existing customer. Never forget that.
You need to know your retention rates for your business and you need to find ways to improve it. One of the best ways to do this is to communicate with your customers often. Survey them. Ask them questions. Find out what additional products and services they would like you to offer.
Find out what you can do to improve the relationship you have with them. Find out what they like and dislike about your products and/or services and business. Try to keep them happy so they keep coming back and they send your referral business. When customers stop coming back, call them and find out why.
Once again, the real profits in any business are from repeat customers. If you’re only focused on getting new customers you are missing the boat. Make sure you spend at least 50% of your marketing budget marketing to your current customer base.
Once your business has a huge customer base (varies based on what you sell and your margins, but probably 1,000+ customers) you can focus 80% or more of your marketing on marketing to existing customers. Whatever you do, don’t make the mistake of not communicating and taking care of your current customer base.
# 4 Revenue
How much money does your business bring in on any given day, week, month or year? You need to know this number like the back of your hand. Without revenue every business will fail. You need to keep a close eye on the revenue and have the ability to project how much revenue you can expect to earn in the future.
You should know your revenue comparison from month to month, year to year, and for the same month in previous years. At a bare bones minimum, know your average monthly revenue, know which months are the best, which months are the worst, and look for ways to improve.
Use your current revenue as a benchmark and come up with ways to increase revenue.
# 5 Profit
Profit is the most important key metric I can think of in any business. You need a profit and loss statement for your business. You can do this yourself or have your bookkeeper help you.
I simply use a Microsoft® Excel® spreadsheet and track my income and expenses each month. Each month on the first of the month I sit down and add up all of my receipts for the previous month. I take those totals and input them into this spreadsheet and then I calculate my profit (or loss) for the month.
I also look for trends, such as huge increases or decreases in revenue and/or expenses. This lets me keep my finger on the pulse, before anything gets out of control.
On a side note, I’d like to remind you that most businesses do take a year or two just to get profitable. Some businesses can do it quicker, but most take a couple years. However, if you’ve been in business a few years now and still aren’t making a profit, you’re probably doing something wrong.
# 6 Gross Margin
Gross margin is the difference between revenue and cost before accounting for other costs. Gross margin is the percentage of the selling price that is profit. Let me give you an example to put things in perspective.
Let’s suppose that you sell t-shirts online. You buy the t-shirts wholesale for $3 each and sell them for $9 each. In this example your gross margin is $6 per shirt, or 66% ($6 is 66% of $9).
As I see it, that’s pretty decent. What’s important to remember is that you really have two options in a business. If you have a low a gross margin, you will have to make up for it in volume. Businesses like Amazon®, Wal-mart® and the Dollar Store® thrive on this business model.
Personally, I think it’s much wiser to sell products or services with a higher gross margin. I personally like to sell products and services (information products and coaching) because my margins can be 500% or higher. When you do that, you don’t have to sell as many things to make a nice profit.
The moral of this lesson is to know your gross margin. Get your starting point. Always look for ways to introduce additional products or services with a higher margin.
# 7 Net Worth
Your business needs a balance sheet. This is very similar to calculating your individual net worth. You need a way to track your business assets and liabilities on one simple sheet.
Each month you need to update this sheet so you can see where your business stands financially. This ensures you keep a close eye on your business debts and shows you whether or not the “value” of your business is growing. I use a simple Microsoft® Excel® spreadsheet to track my numbers and I recommend you do the same.
This comes in really handy when you want to sell your business, get a business loan, or if you simply want to determine the value of your business. Just remember that you should have two reasons for owning a business: to provide an income to live on AND to build an asset that you can one day sell for a big profit.
In summary, knowing your business numbers is vitally important if you want to succeed in business. Smart entrepreneurs realize that what you don’t track gets neglected. At a bare bones minimum, smart business owners track the things I mentioned in this post, plus any other key metrics that are relevant to their business.
What are your thoughts about knowing your business numbers? What do you track each month and why? Leave a comment below to share your thoughts.
DISCLAIMER: I am NOT a financial adviser or accountant. This article is simply my opinion and is for educational purposes only.