As a business owner, you’re likely monitoring a number of key performance indicators (KPI) to determine how well your company is doing. And if you’re launching a new business, you’ve undoubtedly heard about the importance of KPIs. Whether related to your financials, advertising, turnover, and/or website traffic, these metrics can be a great way to measure, maintain, and improve a business’ growth.
Yet there are a few metrics vital to a company’s long-term success that many business owners—especially first-timers—overlook or fail to track effectively. Ignoring these numbers can keep your company from achieving its full potential. Here are three such metrics you should keep a close eye on.
While most business owners are aware that employee satisfaction is important, most don’t realize just how critical it is. Indeed, some business experts rank employee happiness as the single-biggest driver of a company’s success.
This makes sense, seeing that happy employees are not only more productive, they also typically deliver better customer service, which can lead to increased sales and repeat business. On the flip side, unhappy employees can cause slow and/or lost sales, as well as decreased customer satisfaction.
What’s more, a satisfied team means less turnover, which can be uber costly in terms of recruiting, hiring, and training expenses. Given this, it can be useful to track both employee satisfaction and the costs of employee turnover. When employee satisfaction increases, your turnover costs should fall.
Start by making sure your employees are as content as possible, and most of the other stuff will usually fall into place on its own.
Cash conversion cycle
One frequently overlooked financial metric is your company’s cash conversion cycle (CCC), which tracks how quickly your customers pay you, compared to how long it takes you to pay your suppliers. According to Harvard Business Review, Amazon’s Jeff Bezos has mastered the CCC, which frees up loads of cash to invest as he pleases.
CCC is easy to calculate and a good measure of your cash flow:
1. First, determine the number of days of inventory you hold on average.
2. To that number, add the average number of days it takes for your customers to pay you.
3. Then, subtract the average number of days it takes for you to pay your suppliers.
The lower the number, the better. Back in 2013, Amazon had a record CCC of negative 30.6 days. However, getting your company’s CCC into the single digits is a fine target to shoot for. This often requires incredibly efficient inventory systems, flexible terms for your suppliers, and encouraging customers to use speedy payment options.
Profitability per product or service
Many business owners assume that selling their most expensive product or service should be their top priority. But sometimes, the most profitable thing to sell is less expensive. To this end, you should track profitability per product or service to figure out which items are making your company the most money.
If you primarily sell products, determine the true cost of each product compared to how much you’re selling it for, and then check the average price your competitors are charging for similar products. Products with the highest gross margin (revenue produced by goods minus cost of goods) are the most profitable.
But be certain you’re tracking the gross margin accurately to find out which products are your “best bets.” In some cases, you may need to increase prices to make a profit or stop selling a product all together.
For service-based companies, it can be more challenging to track such profitability unless you charge by the hour, as opposed to charging on a per-project basis or by the month or quarter. To see how well your time is being spent, carefully track the service, breaking down how many hours your team spends to deliver it, along with its costs in terms of employee salary and other expenses. To do this, you’ll need a clear picture of exactly what goes into providing each service, so you can determine which ones are top money makers and which are losers.
However, sometimes a company will offer a service (or product) that loses money in order to attract new clients or to ultimately sell something more profitable to these clients. This strategy, known as a “loss leader,” can be a good way for a new business to introduce itself to the market, build a loyal customer base, and secure future revenue.
With us as your Creative Business Lawyer®, we can help you determine which metrics are the most valuable for achieving sustainable business growth. Also, you should factor your legal, financial, insurance, and tax expenses into the above calculations to get the most accurate measurements, and our unparalleled experience in these areas can be invaluable. Contact us today to streamline your operations and minimize risks, so your company can reach its full potential.
This article is a service of the Quraishi Law Firm, Creative Business Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us at 972-292-7675 or schedule online today!