4 Financial Metrics You Should Be Tracking
It goes without saying that if you run a small business, you need to keep track of your finances. If you don’t pay proper attention, you may miss areas where your business could become more efficient or cut unnecessary costs. These issues could ultimately lead to disaster if kept unchecked.
As such, it’s vitally important to not only keep an eye on your accounts, but also know the metrics you should follow most closely. This will ensure you spend your money well and helps you identify possible areas for improvement.
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In this post, we’ll explore some of the most important financial numbers for small businesses and discuss why you should keep an eye on them. Let’s get started!
Why It’s Important to Track Your Finances
While it might seem obvious, you might be surprised to learn that quite a few businesses don’t bother to properly track their finances. However, any business regardless of size should take the time to keep accurate financial records.
Doing so makes you aware of how well your business is faring, enables you to spot opportunities for optimization, and identify areas where you’re spending too much. As such, you should avoid receiving business earnings into your personal account with no additional oversight. This applies even if you’re a very small business or a freelancer – especially so given the plethora of easy-to-use solutions such as Hiveage.
Important Financial Metrics You Should Be Tracking
(Other Than Operating Cash Flow, Gross Profit Margin, Net Profit Margin)
Tracking your finances can seem difficult, especially if you don’t know what you’re actually looking for. To help you out, here are some crucial metrics you should be following closely.
1. Sales Revenue and Cash Flow
Put simply, sales revenue is the total amount of money you’ve earned. You’ll likely want to know what this is for a number of reasons, but the most important is to track how well your business is doing over time.
By keeping an eye on your revenue over months and years, you can see if your business is growing and identify those periods where your earnings waver. This gives you a solid overview of your economic health. It also helps you see how your business is affected by external factors, such as the time of year.
For instance, if your revenue appears to be largely static, you might want to consider expanding it. Conversely, if revenue is slowing down over time, you may need to consider why this is and take steps to turn this trend around.
2. Retention Rate
Your retention rate shows you how many of your customers stick with you over a period of time. In other words, this measures how many customers you ‘retain’ to ensure they carry on using your services or buying your products. It can also show how long someone stays a customer with you.
As you can imagine, a high retention rate is something you’ll want to achieve. Maintaining your customers means that they’re happy with what you provide, and remain loyal to your business. In turn, this can help grow your business indirectly, as loyal customers are more likely to recommend you to others.
Tracking this is as simple as keeping a record of your current customers. This will let you see how long they’ve been with your business, and also quickly spot a potential issue if several customers leave in a short space of time. You can then diagnose the problem – such as high prices, long delivery times, or lacking support, for example – and address it much quicker.
3. Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) refers to the total cost you spend to gain a single customer. In practice, this is a measure of how effective your marketing is, by considering how many new customers you bring in for every spent dollar.
The main reason you’ll want to bear this in mind is to make sure your marketing efforts are working well. In short, you don’t want to be wasting large amounts of money while only acquiring a small handful of new customers in the process. If your CAC is quite high, you might want to reconsider your marketing to cut costs or make it more effective.
Calculating your CAC can be fairly simple, especially if you’re a small business. All you need to do is divide the total amount you spent on marketing by the number of new customers brought in during this period. For example, if you spent $1,000 on all your marketing in July, and during this month you acquired 16 new customers, your CAC would be $62.5.
4. Customer Lifetime Value (CLV)
The Customer Lifetime Value (CLV) is a way to calculate the overall net profit you receive from a single customer over your entire relationship. You can think of this as like the total bottom line for a customer.
Obviously, this metric is going to be at least partly based on predictions. However, it’s still important to consider because it gives you an idea of how much profit you can expect to earn from your current customer base.
In order to calculate your CLV, you’ll need some data to work with. Put simply, you’ll want to estimate the total revenue from the client, as well as the frequency with which they spend money with you. You can then use this to extrapolate into the future based on the average amount a customer stays with your company.
This is where the CAC from the previous section comes in handy. To look at a very basic example, imagine a client has spent $6,000 over three years, and your CAC is six years on average. At this point, you can estimate a CLV of $12,000 for this specific client.
You don’t need us to tell you that running a small business requires keeping a close eye on your finances. However, knowing which ones are the most important is crucial to avoid losing money or customers. It can also help you spot areas where you can be more efficient with your spending.
In this article, we’ve explored some of the most important financial metrics you should be tracking. These include:
- Sales revenue.
- Retention rate.
- Customer Acquisition Cost (CAC).
- Customer Lifetime Value (CLV).
Do you have any questions about tracking your financial metrics? Let us know in the comments section below!
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