The key financials you need to be tracking in your business
There are some key financials that you need to start tracking in your business, even though money and numbers might be scary to you.
You don’t need to be afraid of numbers, they simply provide data that gives you a really good indication of how your business is performing (note I say business and not you because from now on, I want you to remember they are two different things). You can then use this data to make the right decisions and teak your strategy as needed.
So instead of a finger in the air, and just hoping and praying that you make the right choice, or watching what everyone else looks to be doing, if you actually look at your financial data, you will have everything you need to make every decision in your business.
So what key data am I talking about?
1. Revenue and forecasts
What is your revenue this month? What was it last month? How are you doing compared to the same time last year?
It would be really helpful to create some financial forecasts so that you know what you are aiming for and by when.
You will know at any given point in the month how far off your target you are and you can course correct. If you are faffing about scrolling socials, you know that you need to crack on with the revenue generating activities.
I have no desire to be at my desk all day, so I turn up and do the activities that will generate revenue and knuckle down on other stuff that moves various other needles in my business. When I’ve done that and any client calls, I am done for the day. Increasing revenue doesn’t often require additional hours, it just needs you to use the ones you’re already doing for more better activities.
Your forecasts don’t have to be majorly complicated.
Start by working out how much you want to take out of your business each month. Use my make money calculator to reverse engineer that to a revenue target.
What do you charge per product or service? Divide your total revenue by price per product/service and you now know how many you need to sell. You now have something to aim for every month and you can check in each week to make sure you’re on target.
If you don’t hit the target, what's going on? Is there a problem? Is your marketing not working? Do you have a lead generation issue? Is there a pricing situation going on? It’s at this point you get to play detective and find out. But without the data, we're not going to think about any of this stuff.
2. Profit
Next, it’s time to look at profit.
What is your profit margin (profit as a percentage of revenue)? Is it worth you doing all this work?
I've had clients before who when we go and look at their actual data, although they're selling, they're spending everything they make, they're making no profit, they might as well not be running their business. It is making absolutely nothing for them and despite the lack of funds in their bank account - they haven’t realised it yet!
They're aware of a cashflow hole but there are ways and means to get around that and including borrowings. At no time have they considered the fact that they're not actually making a profit because they're spending far too much.
They're spending money that they don't have. And they would know that if they were tracking their profit and their profitability margins.
Given that you have worked out your revenue target, and you know your profit needs to be the amount you want to take home, the difference between the two is what you have available to spend. It is not negotiable, this is fact. And when you stay within budget, you are smashing this lifestyle business strategy.
3. Marketing metrics
You also want to look at marketing metrics. You want to look at things like, list size, open rates, social engagement rates, return on ad spend.
It’s really worth taking care of your email list because that's also an asset that will drive up your business valuation.
4. Accounts receivable (invoices to customers that haven't been paid yet)
Are your customers paying you and are they paying on time?
In my business model, I am always paid upfront so that helps me. I don't have an issue with customers who don't pay. I also don't have slow payers because you pay me upfront or I don't perform the service, it's that simple.
For my membership clients, payments are collected monthly at varying times through the month depending on when they signed up so that is slightly different. However, the payments are automatically collected so that helps.
If your customers have been slow to pay you, do you have a late payment policy in your terms of business? You should do. If customers don't pay you on time, there should be a penalty for that and you're legally allowed to have one.
So keep tracking the balance on the accounts receivable. How old is that balance? You don't want anything over 30 days if you can help it, but you won't know about it if you're not tracking so look at your accounts receivable, both the balance outstanding and age.
5. Customer acquisition costs
What does it cost to get a customer through your door?
I have had many clients over the years who have spent a metric shit ton of money on advertising and it's just not worth it because by the time the customer comes in, given what we've charged for the product or service, they might as well not have bothered.
My client lost every bit of profit they were going to make on that sale by spending the money on marketing.
Sometimes I think people confuse marketing with going to stuff they fancy doing. They are confused and think that by being in the right rooms, by paying to join the memberships, by paying to go to networking events where you can drink champagne and have a great time, they are marketing. This stuff sounds fun, looks great but does it actually drive revenue? And is it worth the cost?
So let's find out. What is the customer acquisition cost for you? Let's do the maths on that. Of all the things you are spending money on (under the guise of marketing and acquiring customers), how much revenue are you actually generating?
6. Churn rate
How many customers are you losing? If your churn rate is consistently increasing, you've got a problem. Either your product or service doesn’t deliver what you said it would, your customer journey is not great or you don’t have the next level product or service to sell your existing customers into, to keep them in the customer cycle (so long as it is also in their best interest to stay with you).
You won't know what needs fixing if you're not tracking, so look at what your customer churn rate is.
7. Customer's return on investment.
This looks at the return on investment your customers have made in you. What have you generated for them in return for the money they spent on you?
Back in my days of accounting, it was really simple, I would be able to save or make a client at least what I charged them. And I have never not delivered on that. Usually it was around three to ten times my fee. That was where I was aiming.
Now, I don't do the accounting as such, but in my fractional CFO work, you can bet your ass if you're hiring me, there's going to be a return on that.
It could be that I'm going to increase your revenue five times, it could be that I'm going to help you sell your business down the line when you're ready to exit for a massive amount of money that you wouldn't have been able to make without working with me ( remember everything I do is focused on maximising what you can take home now and adding value in your business for if you should choose to exit down the line).
So all the time I'm looking at what they're paying me, what am I generating, and whether people in The Boardroom are making back their monthly membership fee with me through new products or services that they've launched directly from working with me in The Boardroom.
People are increasing their profits in month 1 by 21%, month 2 by 25% and month 3 by 33%. There's a direct increase in revenue and profit that comes from having worked with me in The Boardroom and implementing the strategies and foundations that I have taught.
This means my clients are getting a decent return on investment and at no time am I actually a cost because they make more money from working with me.
And I can track that. And I do track that. And I encourage them to track that.
So whenever somebody wants to spend money on something, my first question is, what is your expected return on investment on this? Is it worth spending the money? Not all returns will be as clear to calculate as my money impact - you may create other returns depending on what you do, in which case don’t worry too much about this metric.
Time to take action!
So there are a couple of key metrics that you want to look at in your business.
You want to create the forecast because that gives you something to work off, that gives you something to try and aim towards which is helpful, then you're looking at revenue, profit, marketing metrics, accounts receivable, customer acquisition cost, churn rate and finally, your customer's return on investment.
These metrics give you an indication of how your business is performing and help you make strategic decisions that allow you to achieve your goals.
If you need any help with working out these numbers, join my free community Destination Unknown and join the Great Business Reset to ask in there, I’ll be more than happy to help.