The Top 10 Metrics Every Business Owner Should Know - Part 2

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Hello there and welcome back. Now, if you're looking to grow your business profitably, you need to be tracking the right metrics. And in this second video, we're going through the second half of the top ten metrics that you need to really transform your business and grow as profitably as you can. Now, my name is Paul. If you've not met me before, I'm an accountant, I'm a CFO, I'm an entrepreneur, and I've got over 25 years experience of helping businesses to grow profitably.

And I've also run several businesses of my own. So believe me when I say I’ve been in your shoes and know how difficult it can be. Now, before we get into the detail, I'd like you to do me a favor and click the subscribe button. I do post new videos every week and I'd hate for you to miss out.

And secondly, as I said, this is part two of a two part video. If you've not seen metrics 1 to 5, do take a look at that first. I’ve put a link to those below and it's worth watching them. First, just to kind of give you a bit of context. The first five were relatively simple, but these are perhaps a little bit trickier.

So you probably want to start off there before we get into the detail. Okay. So we covered metrics 1 to 5 in the last video. In this video, we're going to be looking at 6-10. Metric number six that you should be tracking is what we call customer acquisition cost.

Those are fancy words. Sometimes it's called CAC. Sometimes it's called COCA - the cost of customer acquisition. All it's really saying is how much does it cost you to get a customer? And it's very simple to calculate if you know your marketing costs. So you begin by taking any given month, working out your marketing spend, and then you're going to divide that by the number of new customers that you get in that month.

And that's going to give you a figure, say, a $20 in this example. And it's really important to keep an eye on this. I've actually done a whole separate video on how to plan and run profitable marketing campaigns. So worth checking that one out as well. But this is a really interesting metric. So what this is saying in this example, it's costing you $20 to get a customer.

So then the next question is, well, how much money in profit am I making from that customer and how does this stack up vs. this? And then you also want to be asking yourself,, how does this amount vary on a monthly basis and, if you want to get a little bit more sophisticated, how does this amount vary by different marketing activities?

So there could be a scenario whereby you're advertising on Google. Okay, well, that will give you a cost of acquisition. How does that compare with the cost of advertising on Facebook or a social media paid campaign? Or if it's in a shop, you might have a leaflet campaign or you might have a particular promotion, whatever it happens to be, to get new people in the door.

You want to be measuring this customer acquisition cost and comparing it by across different marketing channels and also seeing how it varies month on month. As I say, it's a flashy name, but a really simple metric that you really need to be keeping an eye on because actually it's this metric that can really run away with you. I worked with a really amazing business a few years ago, which was a footwear business, and it was making a fortune and it grew from nothing to multi million dollars within the space of about three years.

But then let's just say the owners decided to sell the business. They took their eye off the ball and actually their marketing cost started to go up because their marketing was running less efficiently. But they still kept plowing money in every month because they were trying to get to a certain sales number. But actually this cost, for example, went from $20 to 30, to 40, to $50. So they went from making huge profits to huge losses literally just because they took their eye off the ball. So it's really important to try and keep an eye on this because it can run away with you. 

Okay, That's metric six, metric seven is cash generated. Now, I know you're thinking - that’s obvious. But what’s important to bear in mind is that cash is not the same as profit. They can be very, very different. And so if you may well get accounts every month and you may well be looking at a profit - And that's important - but cash is what it's all about, because it's cash that we need to pay our bills.

If you haven't got enough cash coming in to cover those bills, you're going to be in trouble. Now, I won't go into huge detail why they're different, but just a couple of things to think about. It's usually timing. You might sell things on credit. You might make a sale but not get the money for 30 days or 60 days, and so your cash generated in that month could be significantly less than the sales you've made.

It could also be that you've bought all this stock (inventory) and you had to pay for that stock upfront, but won’t actually sell it for six months. So actually that has a huge impact on the cash generated. So this is why this is a really important metric to look at. It’s quite easy to calculate but you might need someone to help you because it's a bit of a bore. If you download your bank statement for the month, just look at the amount of money you got in, ignoring the outgoings for a minute and compare that to your sales. So this is something you should focus on every month as well as profit. 

And then connected to that (and this is something that you probably need an accountant to help you with unless you’re particularly savvy with numbers) you should also  calculate your cash runway which is like a cash buffer. This basically tells us “how much money do I have in the bank and how long will that last me if the sales stop?”  So if I've got $100,000 in the bank as at today and my running costs each month are $20,000, then I've got a five month runway.

In an ideal world, this number should be at least six months or even a year. I can tell you, businesses that have a year’s expenses in cash are doing very, very well. But this is really a kind of an early warning sign that you might be in trouble.

So it's worth taking advice if this starts to get to one or two months. Then it’s time think, “cripes, I need to do something to raise money!”. So it's really important. 

You can get a little bit more sophisticated with this if you want. One thing I'm very keen on, which we're not going to go into today because it's a can of worms, is building a cash forecast. And that is a much more nuanced way of calculating your income,expenses and cash runway. Planning that a few months ahead will give you a much more accurate way of managing your cash, which might be very important if your business is new or loss making. But if you're not loss making or your cash isn’t quite so tight, this higher level way of looking runway is quite helpful. 

But as I said, obviously, it’s cash that pays the bills, not profits and not enough businesses keep an eye on what's going on with the cash in the business. That's why I had not just one but three metrics in my key metrics here. 

Okay,we're going to move on. Metric nine is also connected to cash. It’s called Debtor Days which, if you've not heard of this, is just a fancy name for something which is quite straightforward. Now, if you happen to be selling things on credit (and I'm not really talking so much about credit cards because if you've got a business credit card account, you'll typically get the money in 3 to 5 working days). If you’ve got corporate clients and you're sending them a bill, typically they pay within 30 days or 60 days or sometimes even longer. And then it's really important to be tracking that because, to the point we just made on cash flow, that's an awful lot of money that you're waiting on that you probably need. And so there’s a simple formula to work out on average, how long is it taking your credit customers to pay you?

Firstly, with this metric we’re only looking at sales on credit. So if you've got sales or revenues from different sources, ignore the others for now, because the whole point of this is to keep an eye on these people who get credit, how quickly they're paying.

Next, work out your monthly receivables (aka debtors) and then you're going to divide that by your annual credit sales found and you're then going to multiply the result by 365. 

So for example,if you have an average debt receivable balance of $50k and let's say your average sales on credit over a year are $500K. $50k divided by $500k multiplied by 365 means that on average your customers are paying you in 36.5 days. It's quite useful to keep an eye on this because you want to get this number as low as possible. And it's critical because as I mentioned, most people don't look at the cash movements. 

It’s usually service businesses that have problems with this because, in my experience, a lot of service businesses will do the work, then bill it when it's done and then wait a while before they get money in the bank. I've got lots of thoughts on how you bill for services, but that's the subject of another video.

So what have we looked at today so far? We've looked at customer acquisition costs. We looked at cash generated per month, we've looked at the cash runway or how much money's worth of expenses do I have in the bank. And then we've looked at debtor days.

Quick question. I'd be really keen to find out how many of you actually pay attention to the cash movements in your business. I'd really love to know your thoughts on how you look at cash within your business and if there's any metrics that you use that you think might be quite helpful for others to know, do drop them in the comments below.

Okay, so we've got up to nine, but I promised you a killer metric. I need you not to roll your eyes at this one because it's quite basic, because I can tell you again, not many people measure it, particularly small businesses. The killer metric is customer satisfaction.

Whoa.I don't mean something which is kind of anecdotal. I mean getting absolute feedback by way of surveys or scores, that gives you an idea of how happy your customers are. Why is this? Because customer satisfaction is the key to everything. It's the key to generating repeat business, which is much cheaper than in new business. It's the way your business is going to grow.

You'll end up with cheaper costs of customer acquisition/ marketing costs because actually people are happier with you, and there's word of mouth because people talk to each other. It is the key to everything. If people just come in and are unhappy, that bothers me. You;’ll most likely never see them again, plus they may well be trashing your reputation. 

Every time your customer interacts with you, whether that's a pre-sale query or a customer service issue, you need to be measuring this and need to be asking customers this all the time. Usually just one number like a score of ten is all you need. 

There's a million apps and tools that you can use for peanuts that will help you track this, but you want as high a score as possible because this is the key to long term business success. Quite a few of the accountants I've worked with will focus on profit, which is very important. But actually if you don't have great customer satisfaction, you won't get that profit in the first place.

Right there we are. That's the second five metrics. My top ten metrics that every business owner needs to know to transform their business seem to grow profitably. I hope you found them helpful and to make things easier, I've actually distilled those into a free factsheet, which you can download below and start thinking about how you can start applying some of these to your own business. Look, there's a few things here. You don't have to do all these things at once. Just do one this week to start small and make life easier for you, and just start to see the benefit that you get from it, then add more as you feel comfortable to do so.

And if you do that, I'm also going to send you another free factsheet, which is my guide to turbocharging your cash flow in ten easy steps. These are steps that I've learned over 25 years working with a range of clients, and they really do work, so it's well worth downloading and having a look at that.

 And if you haven't done it yet, as I say, do subscribe to my channel because I'd love to be able to chat to you again. But thanks so much for your time and I will see you in the next video.