Critical metrics will tell the story of the health of your business. But these metrics are not often the first priority for businesses.
Entrepreneurs are known for their vision. They’re the idea people. The big picture thinkers.
Some are also gifted with business acumen and have the strategies for promoting their business and bringing in new customers. But what entrepreneurs often lack (or have no desire to do), is analyzing and tracking data.
And there comes a point in every startup’s journey where you need to take the focus off growth and take a more analytical approach to ensure ongoing success.
Put simply, if you don’t know your numbers – or you choose to ignore them – then you have no idea if your business is sustainable.
To ensure you don’t become one of the 70% of businesses that fail, here’s a list of five key metrics that will provide that all-important snapshot of your company’s financial health.
1. Cost Per Acquisition
Getting the word out there and letting the world know about your product or service is crucial for any business. But as important as attracting new customers is, spending too much on marketing will cripple your startup.
By tracking how much you spend to acquire a new customer, known as cost per acquisition (CPA), you’ll ensure that you’re spending marketing dollars wisely.
To calculate CPA, divide your total advertising spend by the number of new clients that campaign has brought into your business.
Each marketing campaign you run (print, Facebook, Google, etc) will have a different CPA. You should regularly review the performance of each marketing channel to see which ads are converting well and which ones need to be optimized or cut altogether.
You’ll be pleased to know that the most effective way of reducing your cost per acquisition is a cheap fix: crafting compelling copy that speaks directly to your target customer.
2. Churn Rate
Every founder believes in their product or service. It’s their baby after all.
But as blindingly and obviously great your business is, the marketplace might not agree.
Churn rate, which measures the percentage of people that drop your service or product over a specific time, provides an objective assessment of how valuable your service is to the customer.
While it’s inevitable that some customers will stop using your service, a high churn rate can indicate a fundamental issue; such as your service not meeting the customer’s needs, being priced too high or not stacking up against the competition.
Reducing Your Churn Rate
Asking for feedback when a customer quits your service is a simple tool to reduce churn rate.
For best results, ask in person or over the phone. Email surveys don’t provide the same depth of answer as speaking to your customer, and you may not unveil their true motivations for jumping ship.
And as it can cost up to five times more to attract a new customer than to retain an existing one, it’s worth taking the time to connect with your clients.
Also, by taking the time to talk to your customer, you’re showing that you care, and that may just persuade them to give you another chance.
3. KPIs For Hiring Employees
Scaling your enterprise is going to require taking on employees. But there’s a balance you’ve got to get right between hiring the right people at the right time, and taking on too many staff at once.
If you flood your company with new employees and there isn’t a corresponding increase in revenue, then it won’t be long before you burn through your capital. You’ll then be faced with the tough decision of choosing between letting people go, or running your business into the ground – neither of which is a pleasant experience.
On the other hand, not hiring enough staff will mean you’re not reaching your full customer base or revenue potential. You could also be putting your team under stress, which has the knock-on effect of poor customer service.
3 KPIs For Hiring At The Right Time
- Revenue Per Employee – when the average revenue per employee increases, it could be a sign that your team is crushing it and can take on more, or it might be an early indicator of burnout. Speak to your team to decide if it’s more support or more work they need.
- Average Expense Per Employee – if employee expenses are rising sharply, it may be a sign of frivolous spending in some departments. If you’re able to reign in employee costs, there’s the potential to stretch the same budget across more staff.
- Salary Run Rate – salary run rate is the annualized cost of employee wages. Knowing your salary run rate as well the capital you hold in reserve will allow you to make an informed hiring decision.
While it’s important to attract and retain top talent, it’s also critical that you aren’t paying more than you can afford. Scout the job market to see what other companies are offering, and also consider flexible working arrangements (which employees are valuing more than ever) or offering company stock.
4. Run Rate
Run rate allows you to extrapolate your future revenue based on your past revenue.
It’s a great tool for predicting future performance if your business has just started to profit.
For example:
If you earned $10,000 last month, you could use that as the basis of a $120,000 run rate.
As a startup founder, you could also use run rate to raise capital as it gives angel investors confidence in your venture.
Established companies can use run rate as an indicator of how their business is scaling. And by recognizing past growth patterns, they’ll have the confidence to invest more in current operations.
3 Limitations of Run Rate
As handy a metric as run rate is, entrepreneurs should be aware of its limitations:
- It assumes current conditions will continue, and the company doesn’t experience any growth (or decline) in sales.
- You’ll have skewed data if your business is seasonal or the time period used to calculate the run rate is not reflective of typical sales.
- It doesn’t account for large, one-time sales, such as a product release or the onboarding of a new corporate client.
5. Burn Rate
All businesses require an initial investment to get off the ground. This seed money may come from an entrepreneur’s own savings or the deep pockets of a venture capitalist.
But regardless of where the money comes from, it’s vital that it isn’t used up before the business establishes a steady revenue. How quickly the overheads swallow up this cash reserve is known as the burn rate.
The burn rate is one of the most critical financial metrics of any new enterprise. While you can temporarily take your eye off other metrics, failure to monitor and control the burn rate will lead to an early grave for your startup.
Simple Financial Metrics Work
While there are many metrics to gauge the financial health of your company, more is not always better.
Financial metrics aren’t meant to bog you and your team down in unnecessary spreadsheets. Used properly, they keep your finger on the pulse of the business and act as an early warning sign to potential issues.
If you stick to regularly reviewing the key financial metrics in this article, you’ll be able to get on with building your business safe in the knowledge that it’s financially sound.
At Pasquesi Partners, we not only help out clients understand these key metrics, but are also versed in technology tools to provide them visually.
Tools like Spotlight Reporting, Float, and Fathom are great for taking your financials and providing a clear video of your key metrics.
To learn more about how we help you see your critical metrics, contact us on this page.