Important numbers every entrepreneur should know
By Pauline Muindi | April 13th 2021
As a new entrepreneur, you are understandably focused on creating awareness of your product or service, customer acquisition, and selling. And all that is fine and dandy. But for long-term success, every entrepreneur also needs to have a keen grasp of their business metrics.
If you are a fan of entrepreneurship TV shows such as Shark Tank or The Profit, you have probably noticed that the investors stress on the importance of business owners being aware of their numbers. To investors, nothing is as off-putting as a business owner who flounders and murmurs when asked about their business metrics. It sends the message that the entrepreneur doesn’t really know what they’re doing and is bound to fail. As a common business adage says “if you don’t know your numbers, you don’t know your business.”
Keeping track of relevant business numbers helps you identify and prevent disaster before it strikes, stay agile and adjust course whenever necessary. With that in mind, here are the top business metrics should always have at their fingertips:
Revenue is the total amount of income generated by a business over a certain period of time. Also known as gross sales, is useful in tracking the performance of a business either monthly, quarterly, or annually. It is also used in performing forecasts and projections about a company’s expected growth.
As sales is the bloodline of any business, every entrepreneur should always be aware of theirs. However, on its own, revenue doesn’t give the full picture. Revenue must always be monitored in conjunction with other numbers such as bottom-line performance (total profit), cash flow and total costs. If relevant costs are not kept under control, a business might end up losing money despite having impressive sales. Additionally, revenue might not immediately translate into cash, which might lead to cash flow problems if not well-managed.
2. Total Costs
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Setting up a business is often costlier than entrepreneurs anticipate. New entrepreneurs have the tendency to underestimate or overlook certain expenses. Overlooked costs might include rental deposit, insurance, loan interests, and software licences.
Entrepreneurs also tend to miscalculate the cost of their products. To get the total cost of production, you must remember to include duties, transport, breakages, storage, and insurance. Simply put, you have to factor in every single cost associated with making your product and bringing it to markets.
To boost the profitability of your business, try to keep your costs as low as possible. For instance, negotiate for better rates whenever you can or use cheaper alternatives. Avoid purchases that will not increase the value of your product and company. For instance, do you really need to lease a fancy office and buy luxury furniture when starting out your company? Weigh every expense carefully to keep costs down.
However, this doesn’t mean you should penny pinch on every expense. There are times when you will have to splurge to reap maximum long-term benefits for your business. For instance, increasing your ad spend when you have an effective marketing campaign might be a prudent decision in the long run.
3. Profit and Profit Margins
You determine your business profits by calculating revenue and subtracting all the costs of doing business (don’t forget to include taxes, depreciation, interest and other miscellaneous costs).
Without profits, impressive revenue is meaningless – especially for mature businesses. For mature businesses, profit is one of the most significant numbers to represent their financial performance. However, for new companies struggling to get noticed, achieving profitability is sometimes pushed aside in favour of ramping up revenue. If you have sufficient capital, it makes sense to forego prioritising profits for the first couple of years as you reinvest proceeds to grow the business.
To ensure the profitability of your business venture, it is important to be aware of the profit margins. Profit margin is calculated as the ratio of profits to revenues of the company expressed as a percentage. The figure represents the amount of revenue that translates into profits. The higher your business’ profit margins, the more efficient it is.
4. Cost of Acquisition and Lifetime Value
These two metrics are important to consider for your advertising and marketing endeavours. They answer these two questions: how much do you spend to acquire a customer? How much do you make per customer lead during its lifetime?
Calculate the cost of customer acquisition by adding up marketing and sales costs and dividing by the number of customers you have achieved. To calculate the lifetime value of each lead, track all the profits by a customer in a single time frame and deduct the cost of acquisition. You can add variables for a more detailed version of lifetime value.
Being aware of your customer lifetime value gives you insight into customer behaviour and enables you to act accordingly. For instance, a low lifetime value might indicate low customer retention. You can improve this by improving the quality of your product or services, investing in customer care, or focusing on retargeting advertising.
A smart business owner always knows exactly how much his company owes in terms of loans or other business credit. While taking credit is an excellent source to supplement your capital, you should always be careful how much and on what terms you take out loans.
Once you take a loan make sure to leverage it to expand operations and accelerate growth of a proven business model instead of mindless spending. Don’t forget to consider the interest rates on loans and the costs associated with using the facility.
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