Having spent some time at the helm of a small business, I’ve learned that there are three important things seamlessly happening within any successful small business: sales and marketing, operations, and accounting. When all three of those functions are running on all cylinders, the result is a thriving, healthy business. With that in mind, the things you measure — the business metrics — should give you insight into how the business is performing in all four areas.
Although there are a lot of things you can measure, and most of them will provide insight into how you’re doing, I think of those business metrics the same way I do the color commentary in a baseball game. I really loved listening to Vin Scully call a baseball game. But even though Scully’s famous knowledge of baseball and awesome story-telling ability added a lot to the game, it was the hits, runs and points on the scoreboard that told the real story of whether or not it was a win.
In a small business, like a baseball game, there is a lot of information to understand and absorb, but there are a handful of metrics that are worth their weight in gold.
This is information you can’t afford to ignore if you want to build a successful business.
1. Sales and marketing
Although sales and marketing are two distinct disciplines, in most small businesses they are often considered together. Even if you treat your marketing and sales efforts separately, this will still apply to your business.
Marketing includes all the things you do to get new and repeat customers into your business so you can ultimately make a sale.
Even if marketing and sales are two different people (or organizations) within your company, marketing and sales need to work hand-in-glove for your business to be successful.
What are the business metrics?
It doesn’t matter if you call them leads, prospects, or something else — it all starts with getting customers into the door. And it starts with marketing.
Without a doubt, you should be keeping track of how many people express interest in your product or service.
This could be the number of people who visit your website and request information, visit your store, or call you to ask questions over the phone. Although we hope every lead becomes a sale, that might not be a realistic expectation, but you should be regularly looking at how to convert more of those leads (or potential sales) into actual sales.
Counting them and keeping track of how many there are from month to month and year to year will help you measure how you’re doing.
All the leads in the world don’t mean a thing if you can’t close the sale. That’s why the marketing function and the sales function need to work so closely together. How many of those leads turn into sales? There are two ways to look at sales — both are very important:
- The number of sales
- The amount of revenue generated by those sales
Both numbers are important because they give you insight into how effective you are at generating the right kind of leads as well as how good you are at closing sales. By the way, this also applies to your repeat customers. You can’t ignore them.
I know of a dry cleaner that sent regular marketing messages to their current customers offering them a discount on things like cleaning their sweaters and winter coats, the shirt laundry, and other services they provided. They counted how many of them acted on the special offers (that were only available to current customers) so they had insight into how many of those leads became sales. The result? This effort made good customers great customers.
How your business operates can either be a profit generator or a profit leaker. When you consider that operations is a pretty big umbrella that includes your people and your processes, there’s a lot of information you can collect and measure — and one or two places where what you measure could really matter.
Cash flow is the lifeblood of any business.
Whether you’re selling tires at the local tire center, you run a small restaurant, or even a dry cleaner like the example above, without working capital, your operations could grind to a halt.
What are the business metrics?
The formula accountants use to describe working capital is:
Current assets – Liabilities = Working capital
If you divide the value of your current liabilities into your current assets, you’ll come up with a ratio — the goal should be to shoot for twice as many assets as you have liabilities (2:1), but most small businesses aren’t able to do that. Anything below 1:1 should be a red flag that you have negative working capital — even if you have cash flow in the bank at the end of the month.
In other words, if the ratio drops below 1:1, you could be on a slow march to going out of business if the trend persists.
If you are uncertain about your current assets and your current liabilities, you should talk to your accountant, CPA, or other trusted business financial advisor to make sure you are clear. Working capital is not the same thing as cash in the bank.
Because this is an important business metric that will signal whether or not you have the capital you need for day-to-day operations, it will also help you make informed decisions regarding whether or not a small business loan makes sense, if purchasing that new piece of equipment is a good idea, or maybe even help you know if your revenues are headed in the wrong direction.
Cash in the bank
Every business should try to maintain some cash in the bank. In much the same way my grandmother used to encourage me to keep a rainy-day fund, it’s a smart idea for business owners to keep some cash on hand to cover emergency expenses, bridge a short-term cash flow gap, or take advantage of a surprise profit opportunity.
How much you have set aside is up to you and depends upon the nature of your business, but my accountant friends always counseled me to have at least a couple of months’ worth of operating cash flow in the bank. If you’re not there yet, start building up your reserves with what you can until you have a couple of months set aside. This is something else you can talk to your accountant about.
One of my best friends is a CPA — and a smart one, too. He’s always willing to offer me advice on the financial workings of my business. He used to say the accounting function is the most neglected part of many small businesses. He also used to tell me that spending time in the numbers was what would make someone a “profit expert.” I think he’s right.
Whether or not you do your own books or hire a bookkeeper, it’s important that you understand the accounting process and what the standard financial reports are telling you so you’ll know if your business is generating, or leaking, profits.
Time spent learning and understanding this information is incredibly valuable when running a small business. Most of this insight will give you a deeper understanding of your assets and liabilities and help you better manage your working capital ratio. In addition to the business metrics outlined above, you should be regularly asking:
- What are my accounts receivables and how old are they?
- What are my monthly payables?
- What are my major expenses? How much are they?
- What are my overhead expenses?
- How do all these numbers compare to last year, last month, or last week?
These business metrics cement success
While there are a lot of things you may decide to measure and track, I’m convinced these four important metrics are the foundational information you need to run a successful business. Very few businesses are able to manage the status quo for very long. Most businesses are either growing or diminishing. Tracking the right business metrics is the way to become a profit expert and keep your business growing and thriving.