March 23, 2015 Financial Management en_US A key to success is keeping a close eye on performance metrics to monitor the health of your business. Here are five business metrics you should use. 5 Critical Metrics to Watch in Your Business
Financial Management

5 Critical Metrics to Watch in Your Business

By Suzanne Kearns March 23, 2015

A key to business success is keeping a close eye on certain performance metrics that help you monitor the health of your business. Here are five metrics you can use to help keep your business on the right track.

1. Conversion Rate

Conversion rate is the number of people, figured as a percentage, who go on to take the action you want them to take. For example, it could be the percentage of website visitors who press the buy button, fill out a survey form, or show up to an invitation-only sales event. This metric helps you determine if your marketing efforts are paying off. In addition, it can provide insight into what is and isn’t working with your product, service, or messaging. To figure out your conversion rate, divide the number of completed actions (those who bought) by the number of possible completions (those who visited your site but did not buy). You can also use this free online conversion calculator.

2. Profits and Sales

A company can close a lot of sales but still not turn a profit. It could be that prices are set too low, or that as a business grows, its expenses grow, too, reducing profits. For example, if your company’s sales grow from $7,000 to $10,000 a month, you may automatically equate this jump in sales with $3,000 in profits. But until you run the numbers, including any increased expenses related to growth, you won’t know how much profit you earned from the increased sales. Remember, the equation to figure your profit is:

Profit = Sales – Expenses

3. Customer Referrals

When your existing customers refer you to other people, it’s a sure sign you’re doing something right. It’s important to track those referrals to measure customer satisfaction. In addition, the more referral business you get, the less you have to spend on acquiring new customers. Some businesses give referring customers a reward or incentive for every new customer they refer, while others simply thank them. You can keep track of who sends referrals your way by asking new customers how they heard about you, or by using a customer referral app like ReferralCandy.

4. Customer Lifetime Value and Customer Acquisition Cost

When you understand your customer lifetime value (CLV), you will gain a clearer picture of how important it is to retain customers, as well as how much money you should invest in acquiring more. For instance, if you run a beauty salon, and charge an average of $100 per monthly visit, and clients stay with you an average of five years, your average CLV is $6,000. To figure the CLV for your business, use the following equation:

(Average sale) x (Number of repeat transactions) x (Retention time for a typical customer) = CLV

Now that you understand what your customers are worth in dollar terms, you can determine what is reasonable to spend in advertising and marketing to attract new ones. Do this by figuring your Customer Acquisition Cost (CAC), which is how much it costs to get new business. Imagine that the beauty salon owner does a direct mailing campaign to 10,000 local residents for $2,000, and gets a 1 percent response rate. Those 100 people book an appointment, and of those, 50 percent become returning customers. To acquire the 50 new customers, it cost $40 per customer, who will spend an average of $6,000 over the next five years. When running these numbers for your business, you will have to determine what amount is reasonable in acquiring new customers for your business, based on these two metrics. To figure your CAC, use this equation:

(Marketing and advertising expenses) / (Customers) = CAC

5. Cash Flow

Without cash, your business can’t operate — so it’s important to track your cash flow on a regular basis. Positive cash flow occurs when the money coming into your business from sales and accounts receivable is more than what is going out. Negative cash flow occurs when your outgoing expenses exceed the money coming in. To keep a firm grasp on your cash flow, you’ll need to run a cash flow analysis weekly, monthly, or quarterly to make sure you have enough coming in to pay what’s coming due.

If you see that you may be entering a cash flow crunch, take some steps to try to prevent it. You can collect overdue accounts receivable, take out a loan, increase sales, and cut expenses.

Keeping an eye on your business’ financial health is critical to ensure that you are able to establish and grow a profitable company. Pay attention to the metrics described above to ensure that you give your business the best chance for success.

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Suzanne has been a full-time freelance writer for 20 years. She’s written for numerous business and financial publications such as Entrepreneur, Reason Magazine, Home Business Magazine, and Money Crashers. Read more