Five Most Critical Financial Metrics to Growing Small Businesses

By: Jonas Akerman
Feb 1, 2023

As a small business grows it is important to look at key financial metrics not so much to tell you what has happened but rather to give early indications of where things are changing. These metrics allow the leader to better prepare for upcoming changes in the business or unplanned events and set the right expectations for all stakeholders: customers, employees, and investors.

 Over the many years of working with small businesses, we have seen that     irrespective of size and industry (to some degree) there are a few key   metrics you need to keep an eye on. The key is to compare the metrics to   previous quarters or years to see if they are growing or declining faster   than revenues.

  1.  Cash Flow. Top of our list is cash flow (cash coming in and cash going   out).  Not knowing your cash flow can lead to very difficult decisions. Often,  we hear the business looks great since the business shows a healthy  profit, but the company keeps on running into cash challenges. The fact is business growth requires a lot of cash and we mean a lot of cash. You may say “we have raised capital from investors and have lots of cash.” Well, the investors may not be willing to help you again, at least not on the terms you like if you come to them too often or earlier than expected.

 

We find looking at weekly or monthly cash flow over a 6-12-month period is critical. When doing this make sure you test your assumptions:

  • the incoming cash will be delayed.
  • the outgoing cash will be higher.
  • some unplanned expenses will arise that will lead to increase costs.

 

  1. Price

The price of a product or service is the most significant driver of profit and brand. It is always surprising that the first item companies and especially people in sales give away is price. A 10% reduction in price can be 50% of your profit margin (assuming you are running a 20% profit margin business) unless you have planned that a certain percentage of your sales will be at a lower price. However, many of the business plans we see account for very little discounting.

As your company grows, it will be difficult to keep track of individual prices so find a metric that allows you to track average price or revenue compared to cost. Often there are industry key metrics which make it easier for you to compare your company to other competitors in your industry. Here are a few examples:

  • Revenue/employee or key employee
  • Revenue/square foot or meter
  • Revenue/fluid oz. or liter

 

  1. Profit-margin/Asset velocity

There are many different overall business metrics such as ROA, ROIC, ROCE, RONA, EP. You should choose the one that fits your company best. All these metrics say the same thing. They are good overall metrics to routinely review and compare to your industry competition.

However, we believe looking at the two drivers Profit-Margin and Asset Velocity really help you focus your efforts to improve your business.

Profit Margin = profits / revenues (you pick gross profit or further down the P&L)

Asset Velocity = how many times you turn over your assets during a period (decide what you count in your asset number and if you want to measure ROA, ROIC, etc.)

  1. Customer acquisition cost/churn

In today’s growing software industry with Software as a Service (SaaS) and the countless companies with membership or loyalty programs, customer acquisition cost and churn are key metrics to monitor.

Most small companies we see are so satisfied when they get new customers/members that they forget they must retain the new customer in the following period (month, year etc.). Companies need to consider retaining a customer as important as acquiring a new. If you can have low churn (customer leaving) and keep them for a long time, you have an enormous ability to grow. Here’s an example:

Let’s say a company spends $10,000 in customer acquisition costs to get one new customer and on average, obtain 50 new clients in a year.

 If they get 50 customers in a year that is $500,000 in costs.

 If the churn rate is 50%, they need to spend $250,000 in the following year just to stay flat and will end up at the end of the year with 75 clients.

 If they instead have a churn of 20%, they need to spend $100,000 to stay flat and can spend the extra $150,000 to obtain new customers meaning they could get well have over 100 customers in the second year.

5. Employee recruitment cost/turnover

Like customer acquisition cost and churn, small growing companies must also look at employee recruitment costs/turnover. Every person has a much bigger impact on the success of the business and the profits. These numbers don’t usually show up in the normal financial statements, but we highly recommend you track them.

In employee recruitment costs, you should not only look at the actual cost to recruit the person but time to when they are productive (time-to-productivity). So, in your costs include training, onboarding, and until they can work sufficiently without help.

Turnover is the number of employees who leave during a period compared to the total number of employees. Sometimes it can be good to look at a few different groups of employees as some groups may have higher turnover and others lower.

The biggest challenge we see for small growing businesses is increasing turnover among employees below the leadership team and/or the managers. The reason for this is that as the business grows, people who have proven themselves successful in their current role, for example, a successful salesperson is promoted to leader/manager. We also often see employees become senior leaders as they have been in the business since the early days. Many times, these people might not be great people leaders, or they haven’t had the time to train or develop their leadership skills. Therefore, turnover goes up as many employees leave a company because of a poor leader/manager.

Keeping a watchful eye on these five key metrics can help you more effectively steer your small business.

Jonas Akerman Jonas has been a life-long entrepreneur and business leader. He enjoys writing about finance and operations.
Categories
Recent Posts

10 Tips to Scaling a Small/Midsized Business

Hardly anyone focuses on the challenges you have as a leader of a small business that is established and growing. It really doesn’t matter if you are a leader with around 20 employees and growing or 100 employees and growing. After working with tens of thousands of leaders over the last 25 years, research, and my own experience growing a business to around $100M, I have these 10 tips for scaling your small to midsized business.

Listen to Refine and Grow Podcast with Jonas Akerman

Listen in as our own Jonas Akerman speaks with Justin Uhler and Lynse Allen of Refine and Grow about how to grow a small business and what indicators point toward success.

Join Us for the FREE Business Culture Summit - June 30

We wanted to share this opportunity with our small business leaders reading our blog. It is not often that we can participate in high-quality, professional development experiences at no cost. But, here is one of those opportunities.

Jonathan Dapra: The Architect of Business Success

In this post, I wanted to call out some insights from my recent interview with Martin Piskoric from the 21st Century Entrepreneurship podcast entitled “Jonathan Michael Dapra: The Architect of Business Success.”