5 Metrics to Gauge Your Business Performance
Sometimes, the most telling numbers in your business are not necessarily on the monthly financial statements. Although the foundation of your finances revolves around the balance sheet and income statement, there are a few numbers that, when known and tracked, can make a huge impact on your business decision-making. Here are five:
1. Revenue per Employee
Even if you are a solo business owner, revenue per employee can be an interesting number. It’s easy to compute: take total revenue for the year and divide by the number of employees you had during the year. You may need to average the number if you had turnover, or adjust it for part-time employees.
Whether your number is good or bad depends on the industry you are in as well as a host of other factors. Compare it to prior years; is the number increasing (good) or decreasing (not so good)? If it is decreasing you might want to investigate why. It could be that you have many new employees who require training, causing productivity to slip. It could also be that revenue has declined. 2. Customer Acquisition Cost (CAC) If you’ve ever watched Shark Tank®, you know that CAC is one of the most important numbers for investors. This is how much it costs you in marketing and selling expenses to acquire a new client. Factors such as annual revenue, type of business and lifetime value of a client will affect how low or high you can allow this number to go. 3. Cash Burn Rate How fast do you go through cash? The cash burn rate calculates this for you. Compute the difference between your starting and ending cash balances and divide that number by the number of months it covers. The result is a monthly value. This number is most relevant for startup entities that have not yet shown a profit, as it helps to project the cash the business will need to borrow or raise to fund their venture until it is self-sustaining. 4. Revenue per Client Revenue per client is a good measure to compare from year to year. Are clients spending more or less with you, on average, than last year? If less, you may want to investigate the reason. 5. Customer Retention Rate If you are curious as to how many customers return year after year, you can compute your client retention percentage. Make a list of all the customers your company had last year. Then create a list of customers who have paid you this year. (You’ll need two full years to be accurate). Merge the two lists. Count how many customers you had in the first year. Then count the customers who paid you money in both years. The formula is:
Number of customer who paid you in both years / number of customers in the first or prior year x 100 = customer retention rate as a percentage.
New customers don’t count in this formula. You’ll be able to see what percentage of customers came back in a year. You can also modify this formula for any length of time you wish to measure. Try any of these five metrics to gain richer financial information about your business’s performance. And as always, if we can help you interpret or improve these metrics for your business, be sure to reach out.
About the Author - Lisa Wollney is a licensed CPA in the state of Illinois. She started her career at ECS in 1988 as an intern and then joined the firm permanently in 1989 after graduating from Western Illinois University with a Bachelor’s Degree in Business. Lisa’s areas of expertise include accounting, financial statement review and compilation engagements, corporate and personal income tax preparation and lease accounting for small and mid-size lessors. In her free time, Lisa enjoys spending time with her family and supporting both of her daughters’ very busy activity schedules.