[This article was written by Craig Middleton.]
Small business professionals have their hands full trying to manage people, processes and cash flow. The challenges are never-ending for any management team. Prudent entrepreneurs and managers alike recognize the necessity for measuring key indicators of corporate health so that crucial adjustments can be made to meet corporate goals.
Establishing reliable measurement tools as early as possible in any new business allows managers to gain true insights into how well the business is performing month to month and year to year. These numbers can also be compared to competitors’ figures to determine strategies for future growth.
Most managers agree that they want to see revenues climbing. That overly simplistic approach to business growth can get a business in trouble if they don’t go deeper in their analysis, comparing it with related advertising costs and competitive factors.
Forbes reports that business revenue figures should be evaluated in terms of more complicated metrics related to returns on assets and sales.
Customer Acquisition Cost(CAC)
Customers are the lifeblood of business. Calculating how much it costs to acquire a new customer is critical to fuel growth or even to maintain current revenue levels. This figure varies widely by industry. Inc. states that the way to calculate this figure is to pick a time period and divide your sales costs by the number of new customers who purchased from you.
Obviously, the lower the costs, the better. When CAC rise, it is time to take a look at the competition and other factors that may be impacting this important calculation.
Monthly Profit or Loss
Evaluating your profit or loss on a monthly basis means analyzing revenue figures relative to costs and assessing upward or downward trends. Variable and fixed costs must be calculated and subtracted from revenues to arrive at a monthly profit or loss total. By evaluating these figures every month, managers can identify costs that are rising or revenues that are dropping. Then, changes can be made to realign return on investment(ROI) percentages.
Pricing can always be modified as necessary to remain competitive and keep margins up in the face of rising costs that are beyond management’s control. Tariffs and material shortages can create this type of situation where the only solution is to raise prices. Small businesses with low inventory levels are particularly vulnerable to this type of problem.
Inventory levels fluctuate in any business. As one of the most important assets that any business has, managing inventory levels is an important task. When you have too much inventory sitting for too long, then cash flow is negatively impacted. If you don’t have enough inventory available to fulfill customer orders in a timely manner, then you risk losing business over poor customer service or lost sales.
It is easy to understand why this delicate balance of having just the right amount of inventory on hand is a challenge and must be monitored. Keeping up with inventory levels is also important for managing theft and waste issues. Inventory management software is recommended for taking care of this important business function.
When you hear business professionals talk about margins, they are usually talking about profit margins. Savvy business leaders keep a keen eye on the margins since that is where the profits are. When the margins start shrinking, then something is definitely wrong. It could be anything from low productivity from workers to higher raw material costs. Since profit margins are tied to absolutely every aspect of a business, watching margins carefully alerts management to problems in other areas.
Businesses must use data to stay profitable. The better the data studied, the higher the probability that a business will remain profitable and competitive. By studying the metrics mentioned above, business leaders can continue to compete and remain profitable.