“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.” — H. James Harrington
Everyone doing business is required to keep books of accounts. Failure to do so is an offence under the Income Tax Act (Section 81 (1) (e)) and the Companies and Private Business Corporation Acts.
There is another, more important reason for maintaining records of your transactions. It is the reason that Aston Villa Football Club has fired manager Paul Lambert: performance.
In his book Good to Great, Jim Collins emphasises the importance of the economic denominator in any business. This is the measure of how a business is performing. In football, this is measured by games won. In business, the measure is in the form of profit and ultimately net cash flow — the actual amount of free cash that is available, after all expenses — for distribution to the owners as dividends.
Many SME owners I have dealt with have no idea how much net cash flow their businesses are generating. This is dangerous as one may take out of the business more money than the actual net cash generated, which can lead to a business sinking into debt and collapsing.
What to measure
One of the key challenges with performance management is selecting what to measure. The priority here is to focus on quantifiable factors that are clearly linked to the drivers of success in your business and your sector. These are known as key performance indicators (KPIs).
By regularly measuring performance against the targets, your business will improve. All rewards, recognition, promotion, and bonuses in your company should be tied to performance, to achieving the numbers and measures you have set.
Apart from measuring financial performance, here are some metrics that many small businesses neglect to measure:
Customer Acquisition Costs (CAC)
Your CAC is a critical metric in the early stages of growing your business. You need customers in order to make money, but in order to acquire customers, you will likely need to invest resources into marketing. You need two numbers: the amount your business spent over a given period of time on sales, marketing, and related expenses, and the number of customers you picked up during the same period.
Your CAC is equal to your expenses divided by the number of customers. It will show you how expensive a single customer is to acquire. If your customer acquisition cost is too high, examine your expenses, cut back in non-performing areas and optimise.
Acquiring more customers is incredibly important. What’s more important is what you do with them once you have them. Too many startups fail because they spend more time, money, and effort on getting new customers and neglect the ones they already have. In fact, it costs much more to obtain a new customer than to sell to or upsell a current customer.
For current active customers, simply ask them what you can do to improve their experience. Customers love to share their opinions, so you will have plenty of information. For inactive customers, those who have slowed or stopped using your product, ask them why. Customer feedback can be valuable for fixing problems and increasing retention with minimum effort.
Is your business making money? This is the most obvious and easiest metric of all to measure. If your company is not making money, something needs to change. Whether or not you are making money, how much you are making and where it’s coming from are all important.
Also known as your activation rate, this is a measure of the number of visitors who become customers. High conversion rates indicate that you’re doing something right with your initial exposure, and that people like your product enough to become active users.
Low conversion rates indicate there is a flaw or lack of utility in your product that is turning people away. Asking them why they choose not to buy your product or service is a good way to find out what you need to fix.
The key to measuring this is by asking new customers how they found out about your product. You can add an incentive for customers to refer others easily enough, which will help you get your answers.
As your referral rate increases, your CAC decreases. If you’re spending less to acquire customers, you’re making more revenue from them over their lifetime.
With all of this information at your fingertips, you can hardly go wrong. Once you know what to look for, you can make all of the right decisions and grow your business from startup to successful leader. Your business will be pulling in a profit in no time.
So, start recording all the numbers now and make use of the data in measuring your performance.
Phillip Chichoni is a business development consultant who works with SMEs and entrepreneurs. You may contact him by email, firstname.lastname@example.org. You can also visit http://smebusinesslink.com