5 of the most Important Money Metrics in Small Businesses

There’s much to say about starting a business. It’s tough, very tough.

Though, simply focusing efforts in the right areas at the right time can make it ever so exciting and a lot easier to tackle.

So in this post I’m giving you 5 KPIs that you can be working towards in order to be sure, when starting your business, it will grow.

I also show you how you can massively increase your bottom line profits just by making some small increases to each of the KPIs.

 

The First two Money Metrics of Business

It’s natural to focus most of your efforts on how many customers you have at any one time.

And yes, that's important.

But the number of customers is a direct result of two key KPIs.

1. No of LEADS

2. No of CONVERSIONS.

Here's an example...

If you get 10 leads and have a 20% percent conversion rate, then you have 2 customers. If you get the leads but don't convert them into a sale, you don't have any customers. 

Worse, if you don't get the leads, then you don't have anything to convert. Again zero customers.

So the first two most important KPIs for any business are:

LEADS x CONVERSIONS = CUSTOMERS

Some high profile business owners say you should always have 5 different ways of generating leads. These should be a mix of long term and short term sales tactics and strategies..

Generating leads from only one source is too risky.

So even if you have 2 or 3 that’s better than only 1.

The next 2 Money Metrics

Another mistake is to focus purely on revenue. This sounds silly, because revenue is clearly a KPI.

But here’s a different way of looking at it

Revenue is hugely important to getting any business off the ground

But revenue again is the direct result of two actions. I’ll explain.

Now you have a few leads coming in, you can start to work on the next money metrics.

Here they are:

AVERAGE SALE VALUE and NO. Of REPEAT CUSTOMERS PER YEAR

Here’s the formula.

In the first section we worked out that the number of customers was dependent on the number of leads and conversions.

If 2 customers spend £20 each time they visit your business, you generate £40. If they come back 10 times per year, you generate £400 in revenue.

Here’s that formula again with a slight increase in the first 4 metrics.

3 customers spend £30 each time they visit your business, that generates £90. Now your customers come back 12 times instead of 10 times, per year. Your revenue is now £1,080. That’s more than a 100% increase.

Don’t worry, it works the same in dollars.

So that’s how important it is to have need strategies for increasing each of these vital KPIs.

What are you doing to increase the value of every sale?

Here’s a perfect example. Every time you walk into McDonalds, you order your meal and they say:

Do you want to make that a large?”

That’s because it’s the easiest way for them to increase the average sale of every person that comes into the store.

Even if they increase each sale by £1, their revenue will increase by MILLIONS or BILLIONS.

That’s the Average Sale.

Let’s look at how to increase number of repeat purchases.

If you sell a commodity that will be consumed, then you have a good chance of getting your customers to come back to you month on month.

So if you know most of your customers come back to you 3 times each year, you can be thinking about the best way to bring them back 4 times per year.

Let’s take a look at the equation again.

Average sale = £20

Number of times customer returns = 2

Each customer is worth £40 per yeat

 

The Final Money Metric

This is by far the most important. If it’s not in the positive, your business will make a loss and eventually die.

The final performance indicator is PROFIT MARGIN

Profit margin is the one and only metric that has the final say on how much PROFIT you actually make.

And when increasing the 4 metrics we already looked at, you only need to increase margins by a slight percentage to see a huge increase on profits.

Ask yourself these questions:

  • What can you do to reduce costs but maintain quality?
  • What can you do to reduce customer acquisition costs?
  • What can you do to make people buy more of the high margin porducts?

So there you have it, here they are again. The 5 most important money metrics when growing a business:

  • Leads
  • Conversions
  • Average Sale
  • Number of repeat customers per year
  • Profit margin

Views: 47

Comment

You need to be a member of Small Business Bonfire to add comments!

Join Small Business Bonfire

About the Small Business Bonfire

The Small Business Bonfire is a social, educational and collaborative community founded in 2011 for entrepreneurs that provides actionable tips and tools through a small business blog, a weekly newsletter and a free online community.

Subscribe to Our Newsletter

Members

© 2018   Created by Alyssa Gregory.   Powered by

Badges  |  Report an Issue  |  Terms of Service