In New Zealand 50% of small businesses failing within the first five years, Professional Service Business such as Accountants Lawyers and Consultants are no exception. While there are lots of reasons businesses fail, one of the most common is not paying enough attention to a firm’s productivity and profitability.
The problem is that business owners don’t know where to begin tracking their efforts. They shoot from the hip, trying different things; landing the next big client or finding the next hot-shot talent. All without ever knowing what is actually moving the needle or solving the underlying problem.
It’s a simple but harsh reality; businesses cannot succeed unless it carefully monitors its progress. Part of this means to keep track of revenue streams and recognize potential pitfalls early on.
To quote Peter Drucker, Management consultant, teacher, writer and guru “What gets measured gets managed”
Simple enough right?
Yet, it is surprising how often business choose to track certain metrics but are happy to remain in the dark about other aspects of their business.
To have a successful and healthy business there is something you need to commit to: reporting, reporting, reporting! Say it twice, thrice, a hundred times! As long as you are pulling key reports you can and will stay on top of (and more importantly, build) your business. Through reporting you will recognize your strengths and weaknesses faster, see where exactly it is that you are losing money and spot potential opportunities for growth hidden amongst the numbers.
Businesses that survive year five and beyond keep a close eye on certain numbers and look at them regularly and frequently. Why? Reports with the right metrics act as an early warning system. They scream when something’s wrong early enough that you can head off trouble at the pass. The bigger you are, the more details you’ll need(you’ll also have the bandwidth to provide them). But for the average business, here are seven key metrics to track that can help keep your business healthy:
1. Net Profit
When I say ‘Net Profit’, I mean the difference between total billed value and cost to deliver. It answers the question “Are we making any money”? The cost to deliver the services include all expenses and overheads.
Net Profit is the lifeblood of your firm and is arguably the baseline for what you need to know if your business is successful. Failing to generate profit in your business ultimately means you are on a path to failure.
Ideally, you want to be able to see your average margin across your portfolio of work, across a particular client or vertical within your business and then down at a per ‘job’ level.
While it is important to understand the dollar figure of your net profit margin is important. It is also critical to understand the net profit margin as a percentage of revenue. Ultimately the margin across your portfolio of work essentially matches ‘net profit’ of your business.
2. Customer Acquisition Cost (CAC)
Cost of Customer Acquisition… surprise, surprise, measures the cost of acquiring a new customer. The easiest way to calculate CAC is to pick a specific time period and then divide your total sales and marketing cost by the number of customers you gained. For example, if you spent $1,000 to get 50 customers, your CAC is $20.
The total sales and marketing cost includes all program and marketing spend, salaries, commissions, bonuses, and overhead associated with attracting new leads and converting them into customers.
Clearly, the lower your CAC the better, but how low depends on your business model and your industry. If you’re an Accountant, your CAC may be well over $100 per client. If you’re selling iPhone charger cables, it’ll probably need to be in cents.
“Every business owner has customer acquisition cost. If that business owner does not know their CAC they are essentially the equivalent of a blindfolded poker player.” – Tren Griffin of Microsoft
Successful companies are aiming to constantly reduce the cost of customer acquisition — not just to recoup revenue, but because it’s a sign of the health of your sales, marketing, and customer service programs.
A rising CAC can be a sign of trouble, but not if you’ve introduced a new product or service with much higher margins. Like most metrics, CAC can’t be evaluated in a vacuum; it should be evaluated in conjunction with a number of other metrics. Such as the lifetime value of the customer, retention rate and margin.
If that business owner does not know their CAC they are essentially the equivalent of a blindfolded poker player.”
3. Customer Lifetime Value
Some argue the most important metric on this list. The Customer Lifetime Value CLV provides a prediction of all the value a business will derive from their entire relationship with one customer. Because we don’t know how long each relationship will be, we can either factor in retention rates or make a good estimate and state CLV as a periodic value — that is, we usually say “this customer’s 12-month (or 24-month, etc) CLV is $x”.
To calculate CLV, you’ll need a few variables to plug into the formula:
- Average purchase value: Calculate this number by dividing your company’s total revenue in a time period (usually one year) by the number of purchases over the course of that same time period.
- Average purchase frequency: Calculate this number by dividing the number of purchases over the course of the time period by the number of unique customers who made purchases during that time period.
- Customer value: Calculate this number by multiplying the average purchase value by the average purchase frequency.
- Average customer lifespan: Calculate this number by averaging out the number of years a customer continues purchasing from your company.
Then, calculate CLV by multiplying customer value by the average customer lifespan. This will give you an estimate of how much revenue you can reasonably expect an average customer to generate for your company over the course of their relationship with you.
Ultimately CLV can give you a strong indication of your company’s health in the long-term. Is your current acquisition and retention strategy built for making quick wins in the short term or is it helping achieve sustainable growth?
4. Billable Utilisation
A fancy title for ‘are my people spending too much time on the bench’. Yes, this means timesheet tracking, even if it’s using a spreadsheet (we love Toggl).
You’ll want to know how many hours each employee has billed for each project per client they’re assigned. In a perfectly productive world, each employee has seven billable hours per day (not counting paid time off and weekends). Every 15 minutes they don’t bill costs money. And if they go over the allotted time for a task or project, that also costs money.
Reviewing this report monthly shows which teams and employees are more productive than others. It gives you insight into figuring out how to configure your teams for maximum productivity. It also shows where someone might need more training or coaching. Or that it’s time for him to be reassigned a new role, or even to join another company.
5. Accounts Receivable Ageing
This reveals the health of your cash flow, Accounts receivable ageing is a periodic report that categorizes a company’s accounts receivable according to the length of time an invoice has been outstanding. It is used as a gauge to determine the financial health of a company’s customers.
This is an important number for making payroll and paying your bills. Review it monthly. It shows how promptly (in days) your clients are paying you. You want clients who pay promptly.
It is better to have two small clients who pay on time, than one bigger client that always pays late. If the accounts receivable ageing shows a company’s receivables are being collected much slower than normal, this is a warning sign that business may be slowing down or that the company is taking greater credit risk in its sales practices.
Many Business owners are afraid to rock the boat, so they ignore this report, hoping things will get better if they just keep the client happy. Smart business owners nip late payments in the bud — even to the point of stopping work.
6. Customer Satisfaction
If you care about your brand’s well-being, then you should care about your customers’ satisfaction. Positive customer experience can have a significant impact on the business. American Express reported a positive impact on both retention (4 to 5 times higher retention rate) and spending (10-15% increase). Managing director of AmEx, Jim Bush, said: “We’ve been able to show that increased satisfaction drives increased engagement with American Express products, and that drives shareholder value.”
Net Promoter Score, or NPS for short, is one of the common ways of measuring customer loyalty. NPS was invented in 2003 by Fred Reichheld, a partner at management consulting company Bain & Co.
NPS centres around a single question — “How likely are you to recommend the services?” The answer is given on a scale from 1 to 10.
Based on their scores, customers are sorted into three categories.
- Score 9 — 10: Promoters
promoters are customers who you should focus on — they keep purchasing from your company and refer your services to others. They are the cornerstone of your business.
- Score 7 — 8: Passives
Passives are generally satisfied customers whom you failed to fully engage. For now, they are here to stay, but then won’t get hang-ups about switching to another company.
- Score 0 — 6: Detractors
Detractors are unhappy customers who are likely to spread negative word of mouth and thus damage your company.
Knowing the number of promoters and detractors of your brand, you can calculate NPS using this simple formula:
NPS = % Promoters — % Detractors
because without customers there is no company."
7. Revenue Growth
The final metric that ties the whole thing together – revenue.
Importantly, revenue growth not just the dollars itself.
Revenue Growth measures the ability of your sales team to increase revenue over a fixed period of time. It’d be hard to overstate the importance of the sales growth metric because it is tied directly to revenue and profitability. Without revenue growth, businesses are at risk of being overtaken by competitors and stagnating. Sales growth is a strategic indicator that is used in decision-making and influences the formulation and execution of business strategy.
Growth is the drumbeat by which all organizations march. When performance declines, pressure mounts on the sales organization to deliver results. Conversely, a high percentage growth in sales is cause for optimism for all stakeholders such as executives, the board of directors, and shareholders.
Your growth indicator, being a percentage change over previous years, quarters or months, is critical to assessing your overall success in the market.
If revenue is going up, your strategy is right. If revenue is going down, then there are either market conditions not going your way or a strategy that has failed to deliver.
Tie it all together.
- Having a strong Net Profit Margin will allow you to continue to fund growth, serve clients, employ staff and achieve your long term objectives
- A decreasing Cost of Customer Acquisition can be a sign of the health of your sales, marketing, and customer service programs.
- Knowing the Customer Lifetime Value allows you to understand how much can be spent to profitably acquire and retain customers
- Billing Utilization rate provides an insight in to your client serving team’s productivity. Low productivity affects the profitability of each team ultimately the company.
- Accounts Receivable Ageing is how long it takes for your clients to pay. Having clients that pay promptly smooths cashflow and is a sign of good financial management.
- Having satisfied customers has a positive affect on spend and retention increasing revenue and customer lifetime value.
- Growth in revenue measures your team’s ability to increase sales over a period of time.
Dashboards and Reports
I’m sure your thinking great, now we know what to measure. Now what?
Well, you could boot up Microsoft excel and tap on the keyboard, write formulas, record a half dozen macros and insert a few pivot tables to produce an epic spreadsheet dashboard that looks like a flashback from the early 2000’s. And this would be far better than nothing.
Depending on the complexity of your reporting this could take you anywhere between a day and a week to produce and require manual updating.
Alternatively, you use cloud-based dashboard that allows you to have your key business metrics at your fingertips. There are numerous platforms such as Klipfolio, Domo and Databox.
Our agency loves Databox and use it for our own as well as client reporting.
The dashboard platforms aggregate data from all of your data sources. Such as your CRM, accounting, analytics and social platforms as well as API and SDK to provide up to the minute information all in one place.
This allows information to be displayed in real time by making sure your team knows what’s important. This gets everyone focused on the metrics that matter.
All of these platforms allow you to display your dashboard on screens in your office or to email timely reports effectively automating the reporting process. In additon to this you can set alerts for progress on key metrics through push, email, or Slack and keep everyone up to date without copy and pasting into slide decks and with shorter, more action-oriented meetings
Furthermore, these platforms allow you to set time-bound, numeric goals and track progress automatically.