It makes sense to be aware of and track your main financial indicators. The more you observe what the numbers are doing, the faster you’ll see what’s working and what isn’t, so you can take immediate action.
There are six main business measurements that will give you a regular snapshot of how your business is doing. For each we will outline what you can do to improve them.
Number 1: Gross Margin
Gross margin is the difference between what you pay for a product and what you sell it for. Look to improve your gross margin by:
- Increasing your prices. Make rises small enough not to impact on possible demand (where price sensitive customers might switch if they see the competition as cheaper).
- Reducing cost of goods sold (COGS) by using lower cost materials or different components where possible, without affecting quality. Consider importing if there is a significant cost saving for the same quality and there will be no impact on customer perception.
- Research lower cost providers or consider asking your current supplier to reassess their pricing (especially if you have a good long-term relationship).
- Reducing waste. Conduct an exercise to spot any areas where there is excess waste and then devise ways to minimize. Buy only what you need. Recycle and reuse any waste materials you can and make sure your employees are doing so as well.
Number 2: Average revenue per customer
This metric is about increasing the number of things customers buy from you. It can be products, hours, services, warranties, insurance; anything where a customer is encouraged to buy two things rather than one. Build average revenue by:
- Use the data from your accounting software or sales system to identify trends and plan promotions. Look at what your best customers are buying, think of other products or services that could be sold with them, and tailor special offers to bring these customers in more often.
- Learn to up-sell and cross-sell. Think of the classic “would you like fries with that?” or “buyers like you also bought this”. Whatever a customer is buying would be even better if they bought a complementary item, or your choices can be impacted on what similar people to you have bought (think Amazon).
- Consider tempting customers to spend just a bit more in return for a reward such as free shipping on orders of a certain amount.
- Bundle products and services together. Make sure staff are well prepared to up-sell or cross-sell — part of the art of cross-selling is confidence that the complementary item is exactly what the customer needs.
- Focus on your ‘gold’ customers – those responsible for high, profitable sales. Target the ones with the most potential and then develop a specific proactive plan for each of them.
Number 3: Revenue growth
Steady, predictable revenue growth is the sign of a healthy company. Grow revenue by:
- Use in-bound CRM software to better predict who is more likely to buy from you and set up lead generator tools or content (download our whitepaper), to gather interested prospects to follow up.
- Develop new products or services for your existing customers.
- Creating a marketing plan to identify, locate and sell to new customers. Look for new distribution channels to expand your customer base, such as third-party selling (Amazon, e-bay, iTunes etc.), and your website.
- Exporting is a valid way to find new customers, though as a first-time exporter you’re best to get as much help as you can.
- Franchising is a popular option especially if demand for your product or service warrants it.
- Use CRM software to help track leads and be more efficient in gaining new customers.
Number 4: Revenue per employee
Revenue per employee can be affected by several factors, including average revenue per user, better systems and processes, and automation. It’s often useful for those businesses that sell per hour. To encourage higher revenue per employee, try:
- Making sure your staff have the equipment and training they need to do the job right and keep them informed about business performance and management decisions, especially those that affect them.
- Setting goals for your employees. Help them put a sales plan in place, and then measure how successful it is.
- Optimizing incentives for your employees regularly to find out what they want and make sure you act quickly on your findings.
- Making sure your sales data is transparent, so everyone knows who’s selling the most.
Number 5: Net profit percentage
This is the margin that accrues from all the effort of a business is the ultimate measure of how a company is being operated. Increase your net profit percentage by:
- Lowering your direct costs or overheads by looking around for better deals on costs such as energy, internet, and telephones. These types of consumables have multiple providers where the product is undifferentiated (the internet is the same thing regardless of who hosts it for you).
- If your location isn’t mission critical then consider moving to pay lower rent.
- Reviewing your equipment needs. It could be that you’re better off leasing equipment only when it’s needed, rather than buying it outright.
- Looking at outsourcing some of your staff needs, such as administrative tasks like payroll, to companies that will charge a monthly fee instead of a salary.
- Making sure you swiftly collect money that’s owed to you – it should be coming in faster than you must pay it out.
Number 6: Net promotor score – customer satisfaction
Tracking customer satisfaction by asking for opinions, feedback and ratings can give invaluable indication of dissatisfaction (for remedying) and of potential advocacy (for marketing amplification). Anything that improves the communication between customers and a business should lead to better decision-making. Try:
- Analyzing the market to identify trends and try to predict customer needs. Find out what people are saying about your competitors and use that information to improve the customer experience in your own business.
- Keeping track of any customer complaints. Document who the customer is, what they were unhappy about, what was done to resolve it and if they went away satisfied.
- Making the most of social media to keep in touch with your customers and measure their levels of satisfaction. You can talk to them directly, ask them to engage in polls and surveys, and incentivize them to go to your website. Optimize your marketing budget and track campaign performance by connecting apps like Google Analytics, Facebook, LinkedIn, or Twitter.
- Using email, send out annual or bi-annual customer satisfaction surveys. Incentivize them to take part in the survey by offering a discount or small gift.
By tracking and improving these six variables, you should be able to improve your gross margin, raise the value of your average sale, drive revenue, build the productivity of employees, increase your bet profit percentage and have happier customers.
Decide which of the six numbers you want to measure, then set up monthly reporting so you can see if they are improving each month. If not, then you can act before the number deteriorates further.
Implement those actions that are relevant to your business to improve each number. The higher and better these can be, the stronger your business.