Business is a numbers Game played by a team – are you playing. to win?
And no, I am not just talking about your Profit and Loss statement or your Balance Sheet, I am talking about the numbers that drive a business forward the levers that move the business in the right direction.
While every business will have critical numbers to manage there are 12 that I have found to be essential in most businesses. When I am working with a client, I like them to get to grips with these from very early on.
I have included below some ways to further enhance the understanding of your business.
1, Number of Leads
This is the very top of the tree, the lifeblood of the businesses, knowing how many leads are coming in to the business is marketing 101 and EVERY business owner should measure this.
Measure leads from all chanels: web enquiries, referrals, telephone enquiries, etc
- Get more insights by measuring the cost per lead (marketing spend/number of leads) and measure this by channel.
2, Prospect conversions % (number of leads/number of prospects) and 3, Number of prospects
Not all leads are created equally, how many of these leads turn into viable prospects? And move onto the next step in your sales process, by understanding this number you can measure the effectiveness of your follow-up process and/or messaging and targetting.
4, Customer conversions (number of prospects/number of new customers) and 5, Number of new sales*
How many of those prospects turn into paying customers? Are you leaving money on the table by not following up properly? Are there gaps in your sales process which allow prosprective customers to slip through the net?
- The cost to “buy a customer” or “customer aquisition cost” (Marketing spend/number of new customers) will allow you to dive deeper into your marketing effectiveness and budget realistically for growth. For example, I have to work with a client for 2 months before I am in profit and this is the case for most professional business owners, chancing your arm to get customers for free is the strategy of the amateur business owner and it WON’T support growth.
6, Average Basket/Order/Invoice. (revenue/number of sales)
There are only two ways to grow a business. One, getting more customers and two, getting customers to spend more. Therefore, understanding what each customer spends is an important factor in running a successful business.
- Customer lifetime value and customer annual value are important measures, undersatanding these numbers will help with long term planning, and budgeting for marketing campaigns.
7, Top line sales figure (revenue)
This is the figure most of us know, and a thorough understanding of how it’s made up (see numbers 1-6) will help you steer your business to greater success.
8, Gross Margin and 9, Gross Profit. (Revenue-Cost of sale)
In golf they say Drive for show, Putt for dough, it’s the same in business. It’s critical to understand what is left for the business after you have delivered each sale.
This usually isn’t the same gross margin used by your accountant! Why? Because accountants are seeking to produce accounts that comply with conventional accounting practice. As business owners we must understand the difference between the gross profit in our accounts and the gross profit we make on every job; the cost of a sale (from a business owners perspective) will always vary with the sale volume and can be expressed as a percentage. But don’t be drawn into accounting custom by including fixed costs in here such as wages, rent and insurances. Yes, they are required to produce your sale but they are fixed costs and using these in your cost of sale won’t allow you to properly forecast, plan and grow.
10, Overheads
Again, these are traditionally indirect costs, but from an owners point of view, these are costs that cannot be changed (or at least are difficult to change) and they DON’T move with the sale volume. Think rent, rates, insurances and lease costs.
Now, I accept that if a business grows to a point the rent may increase if they take on more space – and while this must be accounted for in planning, but it’s not something that will change in the short term so we dont use this as part of the cost of sale – sorry to the accountants!
11, Salaries/wages
Salaries and wages are another fixed cost but one that’s useful to measure in its own right, comparing this to gross profit and revenue indicates how productive the business is.
12, Net profit
On this point I agree with most accountants and this is the figure that really counts, that said by the time you see it, it’s too late to influence it. It is useful to know the figure but put your attention on the numbers above, they will help you drive profit and growth.
* Many businesses will rely on repeat business from the same client. For instance, trade printers or businesses that use a subscription model, the amount of repeat business and “churn” needs to be allowed for, this will provide the baseline for the business. By calculating this seperately you can focus on it and new business as different metrics.
