At the end of the year, it is easy to compare revenue, gross margin, and profitability to the prior year and your business plan. Here are a few ideas of other metrics to consider.
- Customer acquisition cost. Divide the total amount of money you’ve spent on marketing over a set period by the number of new customers you’ve gained. The result is your cost per new customer, also known as your customer acquisition cost. To add more clarity, divide your costs into two sections: current customers and acquiring new ones. Now you have two metrics: customer acquisition cost AND customer retention cost. Compare these figures against prior years to see if you are becoming more efficient. To go a step further, look at how much each new customer spends on average compared with how much it costs to acquire them. Knowing your rate of return for each customer can help you revise your marketing strategy.
- Lead-to-client conversion rate. Generating leads is an essential part of the selling process for most businesses. If this is true for your business, clearly define each step of the sales funnels from lead to purchase. By calculating how many qualified leads you are converting to sales, you can judge how successful your sales efforts are over time. Remember to use these measures to refine and improve your selling process. Even though the conversion process can get tedious, measuring your success allows you to see where your efforts need to go.
- Website traffic. Use tools such as Google Analytics to find out who is visiting your website, from where, and what they spend the most time on while they’re there. You can learn a lot about your potential customers and the market by keeping notes on how your website traffic changes over time and how it reacts to new content. Just don’t get stuck inside this analysis.
- Seasonality. Understand and keep track of the seasonal trends for both sales and number of orders by month in your business. Tracking helps manage human resources and cash flow in all periods of life. Examining sales metrics and web traffic can help you prepare inventory and staffing for the busy season. Tracking seasons will also help you schedule technical upgrades and equipment repairs for expected slow periods. Lastly, you can use this information to shift marketing offers in slow seasons and shift staffing roles.
- Cash burn rate. Keeping a close watch on your cash flow statement and your income and balance sheet is the key to keeping your business running smoothly. Calculate burn rate by subtracting how much you have at the beginning of the month from what you end the month with. You can then divide your reserves by your cash burn rate to see how many months you can sustain that rate.
A key to the usefulness of this measurement is maintaining a forward-looking financial forecast for the next 12 months. It will help you take timely actions to avoid a cash crunch, such as cutting costs, improving sales, or collecting accounts receivable.
Remember that measurements for measurement’s sake are just busywork. The key to all of them? They need to provide an actionable result for your business.
Remember that if you have any questions or concerns regarding your tax situation, give us a call!