As you start the new year, it’s advisable to pay attention to areas of your business to identify problems, resolve issues and measure growth.
Business owners at all stages should follow benchmarking practices – but owners considering selling their business soon or in the future should be especially vigilant.
Likely, you already track some performance metrics in your business, such as profit and EBITDA. While profitability and EBITDA are very important, there are others that many business owners overlook.
Let’s look at some metrics that are equally valuable.
Gross Profit Margin Per Revenue Source and Service
Business owners should review each revenue component whether it be products or services and analyze both the revenue and expenses associated with each. They should also really look at the 80/20 rule in terms of the gross margin per revenue or product.
When is the last time you really studied or analyzed each one of your product or service areas based up on gross margin contribution to the company – including all costs associated with each revenue source? Does a revenue source have disproportionate expenses?
Are these expenses worth the revenue that it brings into your company?
Are there expense components that can be bettered utilized in other parts of your business?
Studying your profit margins across your spectrum of products and services is crucial in bettering your company’s profitability.
Monthly Recurring Revenue Metrics
It is very important to the profitability and value of your business to provide services with monthly recurring revenue. If you do have recurring revenue, you should analyze the cost associated with that revenue (client acquisition, service expansion upgrades, client churn) and understand what percentage of your customers you are keeping, what percentage you are losing and why.
If you do not currently have services that provide monthly recurring revenue, now is the time to put creativity, thought and effort to develop that side of your business
Labor Loaded Gross Margin
If you are running a service business and you have a lot of clients, you need to examine the cost associated with generating gross margin.
Pay attention to which clients demand a disproportionate amount of attention and resources. By looking at profit margins you’ll be able to identify which clients are receiving too much time.
Effective Hourly Rates Spent Servicing Clients
It’s necessary to understand exactly how much it costs to service a client. Once you determine that figure, you’ll know whether you need to charge more. It’s certainly not a good business practice to lose money on a client.
If you can’t make money on the client, then you may need to fire that client or have a frank discussion with the client. So, calculate this metric for each client, analyze the results and increase your monthly fees when necessary.
Customer Contribution/ Client Concentration
While large and loyal customers are an asset to your business, customer concentration of too many large clients (in relation to your total customers) can be a red flag when you are raising capital to expand your business or selling your business. Keep track of customer concentration so that your customer portfolio is in balance and that your customers are evenly distributed across your customer base.
Client Churn Rate
How many clients do you lose each month? And why?
You should be tracking this statistic in your business. Some churn is inevitable but a sudden decrease in customers means you need to take a look at your business. Is it an employee issue? A product or services issue? Are you losing business to a competitor?
The sooner you identify the issue and act to correct course, the quicker your business will recover and rebound.
Employee Churn Rate
Your employees are your biggest asset.
Are you retaining employees? If you are not, why aren’t you?
Is it because of ineffective managers?
Lack of training? What can you do to better train your employees?
What can you do to cut down on this rate?
Are your compensation plans competitive? Are you rewarding and recognizing your employees?
How do your employees stack up against your competition?
How many client leads do you actually convert into new clients? Generating leads is great but a good conversion rate is critical to the success of your business. It’s also important to understand lead source and testing new lead generation strategies when necessary.
Return on Investment
Any time you spend money in your business should be done with the intention of calculating the return on both the soft (employees, etc.) and hard (actual cost of goods – equipment, software, web development, social media, online branding, supplies, etc.) to generate that income. Understanding this information – and making adjustments based on it – is critically important..
There are many metrics to choose from in running your business. The most important thing is to choose the ones that will benefit you the most in growing and maximizing profits for your business. And, in the end, using good metrics will pay off for you when its time to exit and sell your business. Buyers do pay more for well-run businesses with strong processes in place.
This article was written by Harvest Business Advisor Partner, Richard Stopa.
Clients choose Harvest Business Advisors for our accurate business valuations and our proven ability to deliver the highest price in the smoothest sale transaction possible. Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at firstname.lastname@example.org or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.