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Learn about four important financial performance metrics for evaluating your business.
When you’re running a business, you likely are putting your heart and soul into it every day. You are passionate about the product, service, or idea you’re promoting and it shows. But the bottom line is if you’re not having financial success, your business doesn’t have much of a future, regardless of your passion. When you’re trying to evaluate the success of your business venture, it can be hard to separate that from your passion and devotion, but the financial metrics don’t lie. Here are four important ones (beyond profit margins) to keep an eye on to continually evaluate its performance as you grow your business.
Customer Acquisition Cost
This metric looks at all of the aspects of attracting and acquiring new business. New customers are going to be vital to growing your business, but every single new customer has a cost associated with them. This could be a small cost, like how much you spend on custom marketing materials and your website, or it can be large, like the cost of producing and running a TV commercial. If these marketing tools produce a lot of new business (they are effective) and the cost per customer decreases. If they’re not effective (for instance that website only draws a single customer), the cost per customer increased.
Customer Lifetime Value
Another related metric is the value that each customer has over their lifetime, in terms of the profitability they offer as a customer. Different markets and different regions may have potential customers with more or less lifetime value as well. Another part of this metric is determining the likelihood that customers may return – for instance, if you only build pools they will likely only need your services once, but if you also refinish and repaint pools they will likely need your services every few years.
Labor Value
The Labor Value Multiple is a metric that compares how much your team payroll costs vs. how much business they produce. In service businesses, this is the key factor in determining wages vs cost of services. If your average employee can complete the service that costs $50 in an hour and get paid $12/hr, your business will survive, but if the employee takes five hours you will lose money.
Current Ratio
The current ratio compares your current liabilities to your liquidity. How much of your short term costs can you pay with your current liquid capital? This ratio shows how flexible you can be. When looking at it, remember that it is also specific to your industry (meaning some industries consider a ratio fine while it would be a bad number in other industries).
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