Six Areas to Determine the Health of Your Business

As the owner or president of your company, you need to know how your business is doing.

  • Is it growing?
  • Has it plateaued?
  • Is it sliding backward?

Six Key Areas

The problem is deciding which metrics to track. Management consulting firms and business consultants have trouble agreeing on what those areas are.

A recent Google search for key performance indicators returned 150,000,000 results. There were articles saying the number of areas to be monitored ranged from as few as four to as many as 136.

If you monitor too few indicators, you could miss some critical areas. But if you’re tracking too many, you can get lost in the weeds and overlook the big picture. There’s really no magic number, but six seems to be a reasonable middle ground.

Here are the six key areas every small business owners should monitor on a regular basis:

  1. Sales
  2. Expenses
  3. Lifetime Value of a Customer
  4. Customer Acquisition Cost
  5. New and Existing Customers
  6. Workforce Satisfaction

Let’s look at each of these in more depth.

Sales

The most critical component in the success of any company is its sales. Sales should be growing. If not, you might have a problem.

To understand where your company is at, compare the number of sales and the total dollar amount for this year to the number of sales and the total dollar amount for the same period last year. Are they increasing? The same? Or decreasing? If the answer is the same or decreasing, you need to find out why.

Expenses

Compare your total expenses for the same period this year with the same period last year.

Normally the ratio between a company’s sales and expenses is fairly consistent. Check to see what your company’s ratio is by dividing your expenses by your sales. That ratio should be the same or less than the ratio for the same period last year.

If the ratio is increasing, that means your expenses are out of line with your sales. Find out why.

Lifetime Value of a Customer (LTV)

How many times does a customer buy a product from your company? What is the average price they pay for the product? Over what period of time do the purchases occur?

For example, a customer who buys four products from your company over 24 months at an average price of $250, their LTV, or lifetime value, is $1,000.

Look at both the average and the distribution of all customers. Is the average dominated by a small group? Or is the distribution more even? A more even distribution is usually a good sign.

Obviously, the larger the average LTV, the fewer customers you will need, and the more you can focus on serving customers instead of landing new customers.

Customer Acquisition Cost (CAC)

The customer acquisition cost is how much your company spends to get each new customer. You can calculate this by dividing your marketing costs for the period of time you are looking at by the number of new clients you got during the same period.

A chart that breaks down how customer acquisition costs vary by industry.
Note that customer acquisition costs vary by industry and marketing channel.

When calculating your marketing costs, be sure to include salaries and other expenses related to marketing staff (or the time people spend on marketing if nobody is full-time on marketing). If you outsource your marketing include those costs.

For example, suppose you spent $115,000 on marketing over the past 12 months, and this led to 500 new customers. Then your CAC, or customer acquisition cost, is $115,000/500 = $230. In other words, it costs you $230 to acquire each new customer.

Generally, the lower your customer acquisition cost, the better. If your customer acquisition cost is growing, find out why. If the lifetime value of your customers is growing proportionally, or faster, then a rising customer acquisition cost is perfectly acceptable. But if the opposite is happening, you definitely have a problem.

New Versus Existing Customers

Customers are the life blood of your business and existing customers are usually more valuable than new customers. Your company has established a relationship with existing customers, and it’s much easier to sell more products and services to them. Your marketing costs also are lower since they already know you.

If you are regularly selling to more new customers and not maintaining your existing customers, something is wrong. Either your product or service may not meet their needs or they’re not happy with the customer service you provide.

When you are selling more to new customers than existing customers, your marketing expenses are also higher, because you are constantly looking for more and more prospects to turn into customers.

If the number of existing customers is shrinking and the number of new customers is increasing, you should take steps to correct it as quickly as possible.

Workforce Satisfaction

 Much of your company’s success hinges on having the right people in the right jobs and making sure they’re happy.

First, look at each position in your company. What are the requirements for each position? Is the person in that position the right one for it? Are they using their abilities fully? Do they love the work they are doing?

If a person is not right for their job, their work will suffer. Try to move them to another position more in line with their abilities and interests. If no such position exists, try being creative and designing one that works for them. If neither of those work, it is probably best for them to move on to another company.

Prior to each review, do a survey of your contractors and employees. If possible, make the surveys anonymous. Also, don’t use a generic survey; instead, develop something that fits your specific business. Design the questions so the responses go from 1 to 10, with 1 being the worst and 10 being the best.

Look closely at any question where the average rating is less than 8; those are the problem areas. Once you’ve identified any problems, make an effort to actually fix them. You’ll never get it perfect, but sometimes even small improvements in morale can make a huge difference.

Frequency of Performance Reviews

If your company has just started operations, do your first review at the end of 6 months and then quarterly after that. After the first year, you should do a formal review at least once a year. Be sure to compare the same period each year to eliminate seasonal effects such as holiday sales.

Periodic formal reviews give you a clear picture of how your company is doing. They show you where you are doing well and help you identify potential problems before they get out of hand.

About Andrew Clarke

Andrew Clarke is President of Ground Floor Partners. Over the past twenty years he has advised hundreds of small businesses on strategy, marketing, real estate and finance. He is passionate about small business, social and environmental justice, and is a proud member of the American Sustainable Business Council, Food and Water Watch, Green America, Food Consultants Group, and the American Planning Association.

View All Posts