June 28, 2023
Which Numbers Matter the Most?
We talk a lot about tracking data points, but how do you know which numbers matter the most? Of course, every small business owner should know where they stand financially at any given moment. After all, you need to know you can cover operating expenses or an unexpected bill.
Imagine you’re a physician (uh - assuming you aren’t an actual doctor already). Your business is your patient. What vital signs would you need to track to know how healthy your business is? Those vital signs can tell you where to make adjustments to keep your business thriving.
We offer three examples of key performance indicators (KPIs) crucial for small businesses. You may know you need to track other numbers instead of these or in addition to them.
Okay, this one’s low-hanging fruit. By keeping track of money coming in, over time, you can compare previous gross profit. Looking at this data lets small businesses measure growth, identify patterns, and even quantify the productivity of different teams.
You can measure growth by looking at revenue numbers quarter to quarter or year to year. Many business leaders of seasonal fields find it helpful to look at monthly revenue from different years. So comparing December to December gives a better indicator of growth.
2. Net Profits
This is the proverbial bottom line. Bringing in revenue is only beneficial with a positive net profit at the bottom of the ledger.
Net profit gives you a better pulse on your company’s health. Add up all the costs associated with providing your goods or services (raw materials, overhead, payroll, marketing, etc). Now subtract that amount from your revenue. Voila! You have your net profit.
To get your net profit margin, divide your net profit by your revenue. This is the percentage of net profit generated by your revenue.
Inflation note: even if the rising costs of goods, shipping, and supplies has you avoiding this exercise, it’s crucial to keep tracking them. Over time, you can make decisions about your pricing, vendors, or marketing.
3. Customer Acquisition Cost (CAC)
Do you know how much it costs to attract a new client? This metric varies wildly from one industry to another.
The formula for CAC is the sum of costs for sales and marketing, divided by the number of new customers acquired. This means looking at all the costs of sales, including the payroll for your team members.
CAC usually pairs with a lifetime value (LTV), meaning the total revenue your business can expect from that customer. Certain segments of customers will have different LTVs, so keeping track of this can really help you forecast other metrics we reviewed.
Disclaimer: These are high-level overviews. For in-depth discussions on your business’s health, please consult a business, financial or accounting professional. You can find great contacts in the Chamber directory under business professional services. You can also take online courses through the National Small Business Association.