If you’re a business owner, you’ve likely experienced moments where things just seem to be going well. Maybe your employees seem extra energized as of late or you’ve heard positive buzz about your latest product. It may even be that the long-awaited arrival of spring is what’s reassuring you that things are shaping up.
Be wary of these feelings. Delight in them, of course (I won’t begrudge anyone for welcoming the sunshine) but don’t derive a false sense of security from them. While employee morale and positive reviews are indicators of a healthy company, they aren’t proof of one.
The only way to know for sure what state your business is in is to look at the cold, hard facts, the financial metrics that, though at times unforgiving, never lie.
Sometimes even bringing yourself to look, let alone analyze, your business metrics can be draining. For that reason many companies keep a close eye on one, key metric—profit—and pay little attention to the rest.
This is a trap you do not want to fall into. Profit is an undeniably important metric, but it is only tells you where your business sits at a single moment. High profits one quarter don’t guarantee gains in the next.
If you want to predict the long-term health of your company and spot warning signs of potential obstacles, you’ll have to look elsewhere.
Here’s where to start:
Customer Acquisition Cost (CAC):
Customer acquisition cost is the sum total of all expenses you outlay to acquire one new customer. The formula for calculating this cost is:
cost of marketing + cost of sales (including salaries and overhead)/number of customers
Obviously, you want CAC to be as low as possible. But keep in mind that the amount will vary based on the size of your business and the value of your customers. Take for example a small-town law firm. This firm may find it difficult to attract several customers (or rather, clients). It will have to spend more of its budget on marketing than a well known, large-scale retailer such as Wal-Mart and thus have a higher CAC. But, each customer this firm does attract will likely provide them with much more revenue than a Sunday grocery-goer will to Wal-Mart.
This financial metric measures the number of customers you are losing and gaining. A high churn rate is cause for concern. Losing customers is a problem—even if you’re bringing in new ones to replace them. This is especially true for small businesses who, with high CACs, invest a great deal in each customer they acquire.
When you lose a customer you lose out on this investment which alone is tough to take. But, whether you’re aware of it or not, losing customers also indicates broader problems your businesses is facing. Perhaps a new competitor has emerged or your prices have risen past an acceptable point.
Monitoring your churn rate can bring these issues to light.
Steady revenue is the basis for continuing operations. If you can’t get your customers to pay for what you’re providing, you lose out on time, resources, and cold hard cash. Without continual cash on hand (cash which stems mainly from sales revenue) you won’t be able to meet expenses.
The first place to look in your revenue analysis is your current amount—how much are you bringing in this month or quarter? But don’t stop there. Compare this number to prior totals. At the end of quarter two, for example, compare your revue total with the amount you brought in during the first quarter and again with your revenue from quarter two of last year.
These comparisons will do one of two things: confirm that your business is pulling in revenue at a steady rate, or highlight irregularities. If you notice major changes from one year or period to the next, dig deeper and ask why. Did you bring on new employees in this time period? Release a new product? These questions will guide you to the source of problems and/or successes and allow you to make necessary adjustments.
If you’re a start-up owner and unsure of how to analyze these financial metrics or others, give us a call. Our outsourced accounting and CFO services experts can help you navigate these waters.