A lot of times as an entrepreneur you can get lost in the process of developing a quality product/service or selling your business to the public that you neglect other aspects of a business that keeps it alive for the long run. Understanding key metrics is crucial and helps you analyze the performance of your business, in terms of where it started, how far it has come, and where it is most likely going. Without these metrics, you might find yourself selling goods and performing services, but still unable to grow your business to the next level. Although every industry has specific metrics that you must know if your company applies to it, there are key metrics that an entrepreneur should be aware of. Here is a list of the top 5 metrics every entrepreneur must watch:
1. Cash Flow
Cash is everything to business. If you are not sure how to handle cash as an entrepreneur correctly, then your business is already failing. One key metric to understand concerning cash is cash flow. Cash flow estimates the amount of money that moves in and out of your business accounts, when money moves out its termed negative cash flow, while money coming in is positive cash flow. Understanding your cash flow is important to know if your bank accounts are increasing or decreasing, after all, if your account goes empty your business is on its way to bankruptcy. Besides, forecasting cash flow will help you know how much cash to have on hand for running business expenses and makes you aware of your cash position, so you know the right time to expand your business. Positive cash flow is always a good thing, but incurring a negative cash flow is not always bad especially if your business is focused on growth, meaning there are necessary expenses you have to make that although hurt your cash position now, will pay profits later on. A simple formula for cash flow is Cash Received – Cash Paid Out.
2. Gross Margin
Gross margin is a metric that reflects the amount of your sales revenue that end up as profit rather than into covering costs of sales. The higher the gross margin, the more you keep on each dollar of sale to spend on other expenses like overhead costs and ultimately increase your chances of reaching breakeven and making a profit. According to Philip Moses, entrepreneurs must know the costs of the goods and services they provide to understand the value of each additional sale and to find a balance in what their business can offer. Don’t just march on with selling, know that as your business grows, your efficiency should improve, and your costs reduce if this isn’t happening then there is likely a problem.
3. Customer Retention
Customer retention, loyalty or renewal rate focuses on the rate at which customers return to your business. Having new customers is important, but to grow a business, you need loyal and repeat customers. To measure customer retention you can use three methods: purchase analysis, direct feedback and customer surveys. Make sure to implement these methods as a regular part of your business with the aim of hearing how people feel about what you provide them and improving or maintaining standards. As an entrepreneur, you must let your customers know you care about them and not just their patronage, always provide great customer service, and work on complaints quickly.
4. Cash Burn Rate
Cash burn rate is the rate a company burns through its cash reserves or balance. It is the same thing as negative cash flow but is relevant enough to stand as a key metric to be aware of. As an entrepreneur in the developing stages of business, your burn rate should be a big concern, especially if your business is being funded. To calculate your burn rate, find the difference between your initial cash balance and ending cash balance for a given time, and divide that value by the number of months in that time or period. What this gives you is an estimate of how much you spend per month and how much you might have left to use before your business goes bankrupt. An example is if you have a business that started with $500k in the bank (initial cash balance) and balances $200k (ending cash balance) at the end of six months. The business has incurred a loss of $300k, and divided by the period, your company spends $50k a month, eventually with that burn rate your business has only four months left before it goes bankrupt. To offset your burn rate, you either reduce expenses every way you can or increase revenue and make profits. If you are unaware of your burn rate, however, your business will suddenly run out of money before you can do anything about it.
5. Net Profit
Net profit is the bottom line of your business; it is the money that is left over after you have made all necessary expenses (both fixed and variable), taxes and interest. It is what tells you what your business is truly earning after all is said and done. As an entrepreneur, you want your net profit to be positive as much as possible. If however it’s negative, you might not need to panic just yet, but a reevaluation of your business is necessary, most likely you need to go through your cash flow for a more precise reading. To increase your net profit you need to do the obvious, increase revenue and reduce expenses. As regards revenue, your “markup” is usually the biggest factor, ensure that the price you charge for your product and service is enough to keep your business afloat, and also allows it grow; to calculate net profit, minus your taxes and interests from your operating income.
