Guess how many businesses fail after 5 short years in operation.
10%? 20%? 30%?
Getting warmer. But no, the actual figure is a staggering 45%! That’s roughly one in every two startups that close down within half a decade of opening.
Clearly, running a thriving company is harder than many people imagine. Thankfully, keeping track of a few key financial metrics is one way to boost your chances of success. Want to learn more?
Read on to discover 8 crucial business metrics and key performance indicators (KPIs) to start tracking this year.
1. Return on Investment (ROI)
ROI is the most basic but most important financial metric to monitor to understand business performance. Here’s the question to ask yourself:
How much money does each dollar I spend return to the business?
Failing to work this out is a recipe for trouble. ROI sets the stage for everything else! If you get back more than you spend, then you’re running a profitable operation; if you don’t, then it’s time to reassess your strategy before it’s too late.
2. Cost of Acquisition (COA)
Do you watch the all-popular American TV show, Shark Tank? If so, then this key financial metric might sound familiar. The Sharks ask budding entrepreneurs for their COA all the time because it reveals how much their business spends, on average, to acquire each new customer.
As a result, it provides an invaluable insight into the efficacy of their sales and marketing strategies- not to mention the company’s overall profitability. Thankfully, working out the COA is easy:
Take the total amount you spent on sales and marketing over a given time period and divide it by the number of new customers you brought in.
3. Customer Retention
COA isn’t the only customer-related metric worth tracking. Your rate of customer retention is equally important. In other words, what percentage of your customer base keeps coming back to spend more of their hard-earned money?
The higher that figure, the better. After all, it’s neither a good sign nor financially ideal if someone buys from you once and never returns. A revolving door develops where you’re making sales, yet always having to pay money to attract new patrons.
High customer retention is much more sustainable. This way, you add to your customer base over time, which creates a snowball effect- your business grows from one success to another.
4. Customer Satisfaction
Customer retention goes hand in hand with customer satisfaction. As you’d expect, the more satisfied someone is with their shopping experience, the more likely they are to return in the future!
Tracking customer satisfaction isn’t an exact science, but your rate of retention provides useful clues. Another way to do it is using surveys (issued via email or in-store), where you literally ask people about their experience.
If you decide to take this approach, we suggest taking the opportunity to seek specific feedback about how your business can improve as well.
5. Gross Profit Margin
Expressed as a percentage for ease of interpretation, this all-important metric reveals how efficient your business’s core operations are at any given time. Calculating it is simple: start by finding your total net sales figure and then subtracting the cost of goods sold (COGS) from it!
This should give you a sense of how effective your business is at generating a profit. However, it’s worth noting that the actual products in your catalog (along with how many of them you sell) will greatly affect the amount of revenue you’re able to generate.
6. Accounts Receivable
Gone are the good old days when cash payments made billing a breeze. Customers came into the store, chose the product/service they wanted, and paid right there using notes and coins. These days, the rise of digital payments means some businesses won’t get paid for up to (or over!) 30 days.
That’s bad news for busy business owners. The temptation is to pursue new sales and customers, but that can easily come at the expense of collecting accounts receivable (i.e. the money you’re owed from previous sales).
Don’t fall behind here. Stay organized and keep tabs on the age of accounts receivable, ensuring those sales actually lead to revenue. Top tip: clever tech solutions, such as auto repair shop software for businesses in the automotive industry, can facilitate this process.
7. Monthly Burn Rate
Content may be king in the marketing world, but cash rules the roost when it comes to overarching business success. Without capital, it’s a matter of time before the business folds! That’s why it’s vital to keep track of something called “burn rate”.
This is the rate at which you’re spending cash (or burning a hole in your pocket). With a finite sum in your account, knowing your burn rate will reveal how long you can survive before having to arrange further financing.
8. Social Media Penetration
Here’s a KPI that didn’t even exist until recently. Yet, given the modern-day impact of social media on business growth, it’s another important one to track in 2022 (of course, if you’re yet to dive into social media, then that’s job number one!).
The clue’s in the name with social media penetration.
In simple terms: how effective is your SM marketing at reaching and engaging your target audience? If your rate of engagement’s going down and your ROI is dwindling too, then it’s time to alter course. You’ll boost sales (and your online following) by publishing higher-quality creative that’s targeted to greater effect.
Don’t Forget These Key Financial Metrics
Most businesses fail, which is why sensible entrepreneurs must do everything in their power to defy the odds and grow their companies. Are you in a bid to do exactly that? Well, a great place to begin is by tracking the key financial metrics and KPIs we’ve discussed in this article.
With these insights up your sleeve, you should be one step closer to turning your business into a success. Don’t miss out on more useful insights of this nature! Stick around and browse similar articles on our website today.