Recently, someone asked me the following:
Question: “In addition to metrics like cash flow and revenue, which are a given, what other metrics should business owners watch? I understand that metrics may depend on the industry or particular requirements. I’m not just interested in the basics but also how to determine the metrics for a particular company with specific needs.”
Here is how I responded:
While business metrics like cash flow and revenue are a given, unfortunately many business owners do not measure or track cash flow and have numerous issues as a result. Additional metrics depend on the business including:
1. Revenue per employee. All businesses should measure revenue per employee but this metric is especially important for consulting-based businesses that depend on employees to both sell and deliver the services. I do not mean generically dividing total revenue by total employee, although that result does provide information regarding overall productivity.
By “revenue per employee” I mean tracking revenue generated by each sales person and team and revenue resulting from each consultant’s service delivery. This metric helps determine who is over-performing and who is under-performing. It leads to additional questions, namely, Why? To address issues identified by the revenue per employee metric, as a business owner you may need to make training available, revamp incentives or match high performers with mid-level performers to share best practices.
2. Customer acquisition costs. This metric can be difficult to measure when starting from scratch. Customer acquisition costs include direct marketing costs, sales costs, and any travel or other indirect costs associated with acquiring a customer. It is therefore better to stick to the basics. To calculate customer acquisition costs, include all marketing costs (online, brochures, events, advertising), all direct sales costs, and travel costs incurred in pursuing new customers. If a trip also included existing customers, omit the cost. Divide the total of these costs by all the customers acquired.
It is best to calculate customer acquisition costs on a quarterly basis. As a business owner, you must then use this metric, or its trend, to make applicable changes to their company’s marketing and sales initiatives.
3. Gross margin. This metric is one that service and product companies must
measure. I have seen contracts be “out of the money” immediately upon signing because the sales team was compensated based on overall revenue. When this occurs, companies generate huge sales that lead to zero or negative profits and cash flow problems. As a business owner, you or your management team must establish a gross margin your company can live with then track the metric and make adjustments to product or service pricing, sales or product incentives, or purchasing program when gross margin drops or fluctuates widely.