Following up on our last article about having a healthier business, we are going to dive into numbers. Without knowing how a company has performed financially, it’s difficult to predict where it can go. When tracking and understanding your business, it’s important to ask yourself these questions.
Are You Profitable?
If the revenue from your services and products are covering your expenses, then you’re making a profit. Yet, the profit dollar amount won’t tell you why you are being profitable. By calculating and comparing different financial metrics, you can locate the different parts of your business that are working well and those that aren’t.
Learn your Net Profit Margin, or sometimes known as a “profit margin,” is the BIG PICTURE view of your profitability. To calculate – divide the net profit by the total revenue, then minus expenses. It’s important to learn whether this is high or low in your industry, and reassess yearly.
Selling products gives you a Gross Profit Margin, which lets you see your product profitability. It’s basically your profit, after deducting direct materials, direct labor and product overhead.
A Comparative Analysis is a side-by-side percentage comparison of two or more years of data. It’s a good way to see if you need to increase or decrease an expense.
Do You Know Which of Your Clients are More or Less Profitable?
Knowing which clients are profitable are essential to a business’s success. If you are in charge of managing profits and cash flow, you must know your customers.
A few indicators that a client is unprofitable, if they are abusive to your team, general aggravation, requiring more time than the typical customer, and not completing tasks to move along.
Having clients that are profitable could be calculated based on the time that they spend with you, also analyzing the costs associated with them. Focus your marketing on the demographics of the majority of your profitable clients.
What Does Your Cash Flow Look Like?
In order to do business, you need to know if your company is generating a profit while having the cash needed for fixed and variable expenses. If your company isn’t doing a good job of managing the amount of cash entering and exiting, you could be setting yourself up for failure. By understanding the strengths, weaknesses, and applicability of each of method of measuring different types of cash flow, small business owners can avoid becoming just another statistic.
What is your Customer Retention Rate?
Your customer retention rate is an important factor in determining how great your customer service is and how fast you can grow your business. It’s best defined as the proportion of customers that have stayed with you for a while. This could be calculated annually, monthly or weekly.
Did you know that it’s almost 5x more expensive to acquire a new customer than keep an old one? Having a loyal client is worth up to 10x as much as their first purchase.
What Is the Lifetime Value of a Client?
Sometimes business owners think that “breaking even” could be an important metric when measuring success – but having the “lifetime value” of a client is probably the most important. It’s important because it will give you an idea of how much repeat business you can expect from a particular client.
Knowing lifetime values can help avoid any cash flow issues while finding creative ways to drive more volume.
What does it cost to get a new client?
Having an acquisition cost is the cost that’s associated in convincing a customer to purchase a product or service from you. The cost would be incurred by your company, which not only includes the product itself – but also research marketing and accessibility costs.
So, take some time to work these numbers, and see if your current plan supports whatever you come up with. Knowing and understanding these number is an important piece of your business’s overall health.
The next article will talk about the importance of customer satisfaction, and how vital it is to the success of your business.