Business Basics: 5 Essential Metrics Every Small Business Owner Needs to Monitor in 2023
As a small business owner, it is often a struggle to keep an eye on everything that is going on. However, to stay on top of your business game, there are five essential metrics to monitor, also known as ‘Key Performance Indicators’ (KPIs). They provide a clear insight into your business’s performance. Let’s explore what these metrics are and their significance.
Net Profit Margin: Are Your Earnings Satisfactory?
The Net Profit Margin denotes the earnings of your business after covering all the expenditures. Consider it as the ‘net salary’ of your business. To calculate this, divide your net profit (the surplus left post-expenses) by your total revenue, and then multiply the result by 100 to get the percentage.
A monthly review of this metric is recommended. If it’s underperforming compared to similar businesses, or if it’s trending downwards, you might need to consider options to reduce expenses or increase sales.
Customer Acquisition Cost (CAC): What’s the Price Tag of Each New Customer?
CAC indicates the average cost you incur to secure each new customer. It’s calculated by adding up the expenditures related to marketing and sales, and then dividing that total by the number of new customers.
Monitor this figure approximately once a month. If it appears inflated, you may need to adjust your marketing strategy to enhance your reach or better target prospective customers.
Customer Lifetime Value (CLV): What’s the Long-term Value of Each Customer?
Another essential metric to monitor is the Customer Lifetime Value (CLV). The CLV estimates the total revenue a customer will generate for your business over the span of their customer journey. Comparing CLV to CAC can provide insights into whether your customer acquisition costs are justified by the revenue they bring in.
It’s calculated by multiplying the average amount a customer spends with you by their purchase frequency, and then by the typical duration of their customer journey. Checking this figure quarterly is a good idea. If it’s declining, you might need to strategize on retaining customers effectively.
Inventory Turnover: Is Your Stock Moving Quickly Enough?
Inventory Turnover is a gauge of how swiftly your available stock is selling. A high turnover indicates rapid sales and minimal time that stock is idle.
Calculate this by dividing the cost of the stock you’ve sold by the average cost of the stock you had during that period. Regular monthly checks can be beneficial. If turnover is slow, improving demand prediction, running promotions, or lowering stock levels might be necessary.
Cash Conversion Cycle (CCC): How Fast Are You Converting Stock into Revenue?
CCC signifies the time lapse from the moment you purchase stock until you sell it and receive the payment. A shorter cycle is preferable as it means your capital isn’t tied up in stock for an extended period.
This is calculated by adding the average time it takes to sell stock and collect payment, and then subtracting the average time you take to pay your suppliers. This should be checked monthly. If the cycle is prolonged, you might need to expedite customer payments, extend supplier payment terms, or enhance stock management.
Conclusion
Even if dealing with numbers isn’t your forte, monitoring these five metrics can offer a comprehensive view of your business’s performance. They can guide you in decision-making and ensuring your business’s robustness. Remember, there are various tools and apps available that can help you navigate through these metrics. Here’s to making 2023 the most triumphant business year yet!
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