Running a business can be tough and most companies are focused on constantly improving their sales. But sales isn’t the only show in town. There are a few metrics that are important to understand in order to maintain a healthy business.
Below are four metrics your business should be tracking today.
Profit Margin
If you only follow one metric, then profit margin is where you should focus. This single metric gives you a snapshot of your overall financial health. To calculate it, simply take your net profit (net income) and divide it by sales (revenue). This gives you a percentage. So a 10% profit margin means that for every $1.00 you make in sales, you earn a profit of $.10.
The most important reason you want to track this is to make sure you are profitable. Seems obvious. The next reason is that you want to make sure you are competitive. If your profit margin is 10%, you may be happy with that. But what if the average margin in your industry is 20%? It’s time to take a look at your costs and make some improvements.
Days Sales Outstanding (DSO)
Your company needs cash to function so understanding how quickly you are paid is crucial. Days Sales Outstanding, or DSO, tells you the average number of days it takes you to collect on your invoices. Reducing your DSO is a great way to improve your company’s cash flows.
It’s also another metric that helps you understand how competitive your operations are. For example, you may be in the medical industry and collecting on your invoices within 40 days, which is good. But in the manufacturing industry, that number drops to 30 days. Once you know where you stand compared to others in your industry, you can start to make small improvements to try and get paid more quickly.
Customer Acquisition Costs (CAC)
While the first two metrics where financially driven, this one is all about sales and marketing. This tells you how much it costs for you to gain one additional customer. The simplest way to calculate CAC is to take all of your marketing costs for the period and divide by the number of new customers you gained.
So if your company spent $1,000 on marketing in the first quarter and got 100 new customers, then your CAC would be $10.00. There are more in-depth ways to calculate CAC, but this simple calculation will help you get started. You can then use your CAC to understand whether certain types of customers or marketing channels are profitable and where you should focus your spending in the future.
Customer Lifetime Value (LTV)
LTV is the amount of money you can expect each customer to generate during their relationship with your company. Check out this infographicOpens a new window to see three of the most common ways to calculate LTV.
Lifetime Value works in partnership with CAC. By understanding the cost of acquiring a new customer and how much value that customer will bring to your business, you will have a good idea of the viability and scalability of your business. If it costs $5.00 to acquire a new customer and they generate $50.00 in value, then get ready for a great ride. However, if your CAC is $20.00 and LTV is $18.00, then you need to quickly focus on lowering your acquisition costs or increasing the value of each customer.
Understanding where your company is today and where it should improve is important for making sure you continue to grow. Remember that no number should stand alone. It’s usually more useful to put them into the context of your industry or give them a partner, as is the case with CAC and LTV.