A Simple Guide To Diagnosing Your Financial Struggles
(3 minute read)
Is your small business struggling financially? It can be very challenging to diagnose the root cause of your financial struggles. With this in mind, we put together a list of some of the diagnostic metrics used by small business owners to gauge the health of their operations. Peter Drucker stated: “If you can’t measure it, you can’t improve it.” At TrueView, we like to put our own slight twist on this quotation: if you can measure it, you can improve it. Listed below are some metrics you may want to consider applying to your own small business.
The purpose of this list is not to overwhelm you, but instead to expose you to a few new metrics which you may not have ever considered, or may be currently neglecting. It is unlikely that all of these metrics will be applicable to your own business, so don’t panic. But, if your business is struggling financially, and you are not quite sure why, some of these metrics may shed light on what’s actually happening.
1) Churn rate: the rate at which customers drop off, during a month, quarter or year, and stop doing business with you, such as canceling their subscriptions or contracts. If your churn rate is excessively high for your industry, something needs to change.
2) Customer lifetime value: the amount of money your business earns from its average customer over the life of the customer-client relationship. This metric reveals the maximum amount you can spend to acquire a new customer.
3) Customer acquisition cost: how much it costs, in sales and marketing efforts, to acquire a new customer. If this amount is higher than the customer lifetime value figure, then your business model is not currently sustainable.
4) Conversion rate: the total number of individuals that become paying customers divided by the total number of individuals who check out your website, mobile app or come into your store. It's a good indicator of the effectiveness of your marketing and messaging.
5) Cost per lead: the amount of money it requires to generate each new prospect or lead, via your sales and marketing efforts. It reveals the effectiveness of your marketing efforts and overall strategy.
6) Return on marketing investment: how much new revenue your marketing campaigns are generating, compared to the cost of running the campaign.
7) Margins per product: the calculated gross profit margin for each individual product or service you offer, in order to identify the most profitable products. It may be a sign to discontinue an unprofitable product.
8) Monthly recurring revenue: the amount of revenue your business can reasonably anticipate based on already established contracts or subscriptions. This gives you accurate insight into future growth potential, diagnosing existing problems and strategic business planning.
9) Cash flow: the amount of cash that flows into, and out of, your business during an interval. Positive cash flow means more money coming in the door than leaving, negative cash flow means more money is going out the door than coming in. A negative cash flow is obviously not sustainable for long, without an infusion of capital.
10) Sales growth year to date: you can obtain an interim snapshot of sales progress to assess growth, monitor trends in real time, or to compare yourself to the competition without waiting until the end of the year. If something subtle is happening, recognize it.
11) Accounts receivable aging: a report identifying how much money is still owed to you by your customers, and how long those payments have been overdue. As this number grows, so do your credit risks.
12) Accounts payable aging: a report identifying how much is owed by your business, to whom, and when its due. Allows you to better understand liabilities, avoid late fees, and manage cash flow on your own terms.
13) Website traffic: the number of individuals who visit your site. It’s essential to discover the size of your potential customer base, how long they remain on your site, which sections of the site prompt interaction, if any, and whether your outside marketing actually works.
14) Customer satisfaction: the degree to which your products or services meet or exceed customer expectations. The point here is to make sure this metric is actually being measured and not neglected.
15) Gross sales: total business revenue before any deductions have been made.
16) Net sales: total business revenue minus any discounts, allowances or returns.
17) Gross profit: net sales minus the costs of goods sold.
18) Gross profit margin: divide gross profit by net sales. A very good indicator of whether or not your business will survive on its current trajectory.
19) Working capital: current assets on hand, minus current liabilities. It reveals whether you have sufficient cash readily available for taxes, debts or emergencies.
20) Break even point: the point at which your costs and revenue are equal, further demonstrating the point at which your business becomes profitable.
Finally, for those of you who may be contemplating, or negotiating, the sale of your business, make sure to determine its calculated intangible value. This is a method of valuing your intangible assets such as brand loyalty, customer lists, data, technology, intellectual property, research, etc.. This should be factored into the sales price, don’t give it away for free.
Thank you for taking time to review this list, your time is valuable. We hope you discovered something that tangibly benefits your own small business. At TrueView, we are committed to making the dream of small business ownership a sustainable reality.
Let’s do this!
