It’s December – the time of the year when you should be asking yourself the two most important questions.
How did we do?
What do we want to do better next year?
Many small businesses are smart enough to start off well, and acquire the first few customers. But very few know how to take it to the next level. In order to measure the success and failure of your small business, you must factor in multiple data sets or metrics. By collecting and analyzing the key metrics of your business, you can establish the strengths, weaknesses and opportunities to improve your bottom line.
So, let’s take a look at those critical areas of your business and how you should analyze them.
Sales Revenue
In plain accounting parlance, sales revenue is the total income generated from the sales of products after deducting costs associated with sales returns and under-deliverable merchandise. Following this approach to sales revenue measurement might make you happy in the short-run, but it may cloud your judgment and prevent you from seeing the actual figures.
In order to determine the actual sale revenue figures, one must mine sales data and go deeper.
Therefore, there’s a need for correlating your sales data with variables such as seasonal forces, price changes, advertising campaign and so on. There are businesses who even apply more advanced and sophisticated metrics such as Return on Assets, Return on Sales, and Asset Turnover Ratio in order to compare their performance with the competition. These factors are integral to conducting sales forecasting in order to devise the business strategy for the year 2017.
Custom Loyalty and Retention
Customer loyalty and retention play a key role in the growth of your business. According to Fred Reichheld, a 5% improvement in customer retention can boost profits by 20% to 100%. As a business, therefore, it’s imperative to drive customer loyalty and ensure customer satisfaction.
There is a wide range of effective tools to gauge customer sentiments, but some common tools are customer surveys, direct feedback at the point of sale, and purchase analysis. Customer satisfaction surveys are an ongoing measure and it pays off in the long run.
Cost of Customer Acquisition
The cost of customer acquisition is determined by the total cost of advertising/marketing to acquire customers over a given time span. When a business is relatively new, the cost of customer acquisition could be higher; however, as the brand image of your business goes up, the customer acquisition cost should go down.
Keeping track of your customer acquisition investments is essential to establish whether your customer acquisitions resources are paying off.
Operating Productivity
Evaluating staff productivity is crucial to every business since your employees are the strongest stakeholder within your enterprise. Periodical assessment of staff productivity adds invaluable insights in the evolving decision-making process of your company.
Productivity appraisal can be performed in various ways across diverse departments such as product development (manufacturing), sales and marketing, and support staff. Your goal is to measure the productivity ratio of each department to understand the potential weak links, if any.
One of the simple ways to calculate the productivity ratio of each department is dividing the total sales revenue by the number of staff members in the department. For example, to determine the productivity ratio of your sales staff, you can divide the total sales revenue in a given year by the number of employees in the sale team. This approach can also be applied to other departments. These statistics are vital components that quantify your competitiveness, especially when compared to other companies within your industry.
Size of Gross Margin
In accounting, gross margin refers to the total sales revenue after deducting the cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage. For example, if the total sales revenue of a company is $500,000 and the COGS is $150,000, the gross margin is $350,000/$500,000 x 100 = 70%.
The COGS could include several expenses such as labor costs and cost of materials supplied. Depending on the nature of your business, the components of COGS could be different. Gross margin reflects a great deal about a company’s efficiency.
Ideally, every company should strive to reduce the cost of production in order to improve the gross margin. For example, a manufacturing enterprise could look for sourcing raw materials from a supplier who offer them at cheaper prices. It could also explore if automation would be a cost-effective option to hire manual labor. In short, measuring gross margin paves the way for innovation in processes and optimization of cost.
Monthly Profit or Loss
Calculation of monthly profit or loss holds immense significance for a company from investors’ standpoint. Many investors believe any company with a less than 60% margin can find it hard to grow in the long run. In order to calculate profit, you must factor in all fixed and variable costs such as rent, salary, insurance, utilities, taxes and so on. While you can optimize the cost of production in order to improve profits, it can reach a dead-end. That’s when you need to think about revising the pricing of your products.
Overhead Costs
Overhead costs are usually fixed in nature, e.g., rent, utilities, salaries etc. Regardless of increase or decrease in sales, the overhead costs will remain the same. Therefore, they significantly affect the profitability of your business. Keeping track of your overhead costs should be your top priority while planning a business venture or estimating budgets for the next year. Businesses that want to keep their overhead costs low can opt for relocating to regions where they could save money on rent and utilities.
Variable Costs
As opposed to overhead costs, variable costs are expenses that vary depending on the volume of sales. For example, the cost of raw materials, labor and shipping will go proportionately up or down depending on the volume of units sold. Tracking variable costs is extremely important as they indicate your operational efficiency. When your variable costs go up despite no growth in sales, you have a serious problem at hand.
Inventory Management
Inventory management can make or break a growing enterprise, particularly in a manufacturing business. The inventory consists of raw materials, work-in-progress goods and products ready for sale. Growing companies often face the challenge of optimizing their inventory in ways that they don’t waste valuable resources on storing goods for a long time. This is exactly why a lot of manufacturing units strive to achieve a quick inventory turnover, i.e. hit the sweet spot between demand and supply of their products. Poor inventory management can negatively affect your cash flow, overhead costs, and profits. If you’re in the manufacturing business, take inventory management very seriously.
Hours Worked per Process
Tracking hours worked per process is of the utmost importance in a labor-intensive business where multiple processes are employed to manufacture goods. Since labor costs can vary depending on the volume of goods manufactured, at one point or another, you might want to adopt automation to reduce your labor costs. Therefore, you need to calculate the total labor hours spent on all functions – manufacturing, sales, support teams.
Final Thoughts
Regardless of nature and size, every business must put in place tracking various metrics of their operations periodically. Not only will this keep their costs down and profits up, it will provide opportunities to develop a competitive advantage within their niche.
