If we look at some of the most successful people operating in business, Richard Branson (Virgin), Anne Mulcahy (Xerox), Larry Page (Google) or Warren Buffet (Berkshire Hathaway) we notice that they at least two common traits – endurance and vision.
Vision is something that is easy to define and most of us in business translate our vision into mission statements and connect the vision with our brand. I know that my vision is to take the stress out of managing business finance and in the process help my clients achieve their next million.
Endurance is a slightly different beast and is essential for optimal business performance but are people born with it or can it be developed?
Every year I aim to run a 42 km marathon and just like a summer body that starts in winter so too does my endurance training for my marathon.
It’s built on each week, each day, it’s monitored, metric, resistance and persistence tested until I get to the point where muscle, heart and body strength are so strong that 42 km seems like a walk in the park!
Running a business is not that dissimilar to training and running in a marathon. You need to have all the key metrics in place before you can even think about developing the endurance to push through especially in today’s business climate which is constantly experiencing disruption and tough competition.
Just like a marathon, if you only focus on one key metric within your business say, the customer acquisition cost, then it’s difficult to have the full picture on where you are right now and where you need to go. So, let’s look at what key metrics you should have in place:
Customer Acquisition Costs (CAC)
This is vital for anyone starting a business. You need customers to make money, but you’ll most likely need to spend money first, to get them. The CAC is the amount of money you spend on marketing, on average, to gain a new customer.
Calculated as: Marketing & sales expenses / no. customers gained
If the number’s too high, you’ll need to examine your marketing approach, cut back on poor performing areas and consider alternatives.
Average Revenue per User (ARPU)
Used mainly for analysis in companies offering subscriptions (think internet services and telecoms), ARPU is used to figure out the average amount of revenue generated by a single customer (or user).
Calculated as: Revenue over a defined period / no. customers in defined period.
This is a great metric to use when trying to figure out how well you’re selling products and services to current clients. If the ARPU calculated is too low, you may not be selling your products effectively and will need to consider strategies (eg offering add-ons etc) to boost revenue from existing customers.
Stock Turnover Ratio (STR)
Are you selling physical goods? Keeping on top of your stock levels is crucial. You generally want a high ratio for this metric, as it indicates the company can sell the inventory it buys.
Calculated as: Cost of goods sold / average inventory
Wages to Sales Ratio (WSR)
If you own a retail business, you want to know your floor staff is proving their worth.
Calculated as: Wages in a week / weekly sales figures X 100
Example: $3,000 weekly payroll / $10,000 weekly sales = 0.30 X 100
= 30% ($30 in wages for every $100 earned)
If your calculations don’t look good, you may need to address some uncomfortable aspects of the business. You could start with some extra sales training for your staff, but you may even need to make some staff changes.
Average Collection Period (ACP)
This metric involves calculating how long it takes for a business to collect money owed by customers.
Calculated as: Accounts Receivable / (Credit Sales / 365)
Generally speaking, you want to keep this number as low as possible, as you need to be able to pay your expenses, and the only way to do that is to collect money owed to you, in a timely manner.
Average Payment Period (APP)
This is basically the opposite of the ACP, as it looks at how long it takes a business to pay money owed to creditors:
Calculated as: Accounts Payable / (Credit purchases / 365)
A short payment period means you’re paying creditors in a timely manner, but it could also mean you’re not making the most of the supplier’s credit terms. If you look into these terms, you should be able to find a payment period that delivers the greatest benefits to you.
Keeping Track of KPI’s
It’s important you and your staff are up to date with how your business KPI’s are tracking. That way, everyone is on the same page and can work toward the same goals.
Here are a couple of ways to keep track:
• Keep a scoreboard/dashboard in the office to display weekly KPI’s; ensuring KPI’s are updated regularly, so the necessary business decisions can be made, or
• Use accounting systems with KPI dashboards. There are some excellent cloud accounting systems that help not only with KPI tracking, but with overall business efficiency.
Outsourcing your finance will be the best business decision you make this year and will enable you to concentrate on developing endurance to your next million.
Cloud CFO provides customised CFO and accounting services for small to medium businesses, helping them to understand their financial position, manage overall business performance and grow their business. Please email us at info@cloudcfo.com.au or post your questions in the comments.