Business Metrics you need to monitor

Imagine you own a successful business but become stranded on a deserted island. The only communication you receive about your business comes once a week on a sheet of paper in a bottle (yes, a message in a bottle). What information would you need and want on that paper? When you remove the subjective elements of running a business and try to do it on objective data alone, how does that change your ability to make the right decisions?

This is the basic of what we would be discussing in the course of this article today. What exactly are the business metrics you need to measure to be able to know that your business is on the right track? The truth of the matter is this; there are various tools and software that you can use to track your business metrics. However, if you do not know what exactly to look for, what would you be monitoring? We can save money on the software for now and focus on finding the best metrics for our business. Once we know the metrics that are the most effective for our business, then we can consider investing in a dashboard tool.

There are four main categories every business needs to monitor if we really want our Key Performance Indicator to show that we are on the right track and some of them will be briefly discussed in the course of this article:

  • MARKETING AND LEAD GENERATION

This is where it all begins. We need leads if we ever hope of acquiring customers. Our dashboard should include the top two to four metrics for measuring our lead generation. These may include number of visits to our website and percentage of those visitors that become qualified leads. The key here is to focus on the processes you are currently employing to market and generate leads and measure on your dashboard the efficacy of these efforts. The cost of acquiring a lead should be included if it is measurable (and it almost always is).

  • SALES

Obviously a lead is still useless to our business if we cannot convert the lead into a paying customer. Conversion of leads to customers is a critical element of most dashboards. In addition, total sales should be included so we know how our volume is doing on at least a weekly basis. Sales should be communicated in terms of dollars, number of sell-able units, and average pricing.

  • OPERATIONAL EFFECTIVENESS

Since a sale is responsible to turn the leads into paying customers, we desire to satisfy and retain the customer as long possible as effectively and efficiently as possible. The point here is to structure our business model so that we deliver everything we promise for as little cost as possible. Let’s review a couple of examples.

If I am a professional service firm that is mainly selling time in exchange for services, then I am concerned about my average cost of paying staff per hour as it relates to my average revenue per hour. I will also be very concerned with ratios like revenue per employee and sales-to-wages.

If I manufacture products, then I will want to understand the efficiency of all of my inputs, including materials (and scrap), labor, contractors, and other direct costs. In essence, we need to look at the major determinants of our gross margin.

We should consider three additional metrics on our dashboard that deal with operations. First on the list will be an indicator of our current utilization of our total available capacity. Second, customer satisfaction and retention metrics are valuable barometers for ongoing sales and the third will be a measure of product or service quality levels.

  • FINANCIAL – CASH, PROFIT, & HEALTH

We should know what is happening with all of our major current assets, which usually includes cash, accounts receivable (AR), and inventory. We should quantify the performance of our AR in terms of total % over 60 days past due as well as the Days Sales Outstanding (DSO). We should understand if our inventory levels are at efficient levels.

We may want to include some of major current liabilities, like accounts payable and line of credit balances. This information leads to the tracking of the firm’s current ratio on a weekly basis and other versions of the current ratio that traditionally predict cash flow with some accuracy.

If you can monitor all these areas successfully, I can assure that your business will be moving on the right track and you will not need to worry about your building closing up sooner than you expect.

May 1, 2016