7 Essential Metrics Every Small Business Should Track
September 21, 2021
According to data from the U.S. Bureau of Labor Statistics, about 20% of U.S. small businesses fail within the first year. By the end of their fifth year, roughly 50% have faltered. And after 10 years, only around a third of businesses have survived.
One of the keys to surviving is goals! Your goals should be two things. First and foremost, they should be YOURS. When it comes to business, throw keeping up with the Jones’ out the window. You need to craft an image in your head and then set goals that will get you to that end result. And second, they need to be SMART:
S - Specific
M - Measurable
A - Attainable
R - Relevant
T - Time-based
For example, “I want my gymnastics gym to be awesome” is not a great goal, it’s a dream! But a goal that could help you achieve that dream would be “In the next five years, I am going to focus on customer experience in order to double the current enrollment in my gym.” This goal is specific, measurable, attainable (presuming the gym has the capacity for double enrollments), is relevant in that it helps us to realize that dream, and your goal includes a set time frame.
Once you have set your goals, you need to be aware of how your business is doing along the way. Some great metrics to focus on that will help you keep an accurate pulse of your business are:
1) Monthly Spend
This one is simple! How much money are you spending in a given month? To have a firm understanding of your finances, you need to know how much your business is spending, where you’re spending it, and if you can save money anywhere.
2) Profit and Loss
Every quarter, you should pull your business’ profit and loss reports to understand your spending habits and income streams. Your profit and loss statement is the best snapshot of your bottom line and can be used to drive your business and marketing decisions.
3) Space Utilization
Are you maximizing your facility space for maximum profitability? Consider how you are using each and every available square foot! Space utilization is a simple calculation. Just take your number of students at a given time divided by your total facility capacity. If you have on average 75 students at a time in a space designed for 100, you're only utilizing 75% of your total capacity.
4) Payroll Percentage
Payroll percentage is your payroll cost as a percentage of your sales revenue. A high payroll percentage may signal that you’re spending too much on payroll. It’s a useful metric to evaluate and can help guide decisions about how much to spend on payroll like when to hire new employees, raise wages or even cut back when necessary. To find your payroll percentage, calculate total payroll expenses and divide by gross revenue. Then multiply by 100 to convert the result into a percentage.
5) Financial Ratios: Liquidity Ratio
Ratios are among the most useful metrics that small business owners can use to determine the overall financial health of their organization. Among the most important are their liquidity ratio: how much cash do you have on hand to pay the monies you owe?
6) Financial Ratios: Efficiency Ratio
Your efficiency ratio is: how much it is costing you to bring in a single dollar. This calculation is simple. All of your operating expenses divided by your revenue times 100 (to convert the fraction into a percentage) gives you your efficiency ratio as a percentage. Say your expenses in a given quarter were $20,000 and your revenue was $60,000. By dividing $20,000 by $60,000, you would get an efficiency ratio of 33%. This would mean that it costs your business $0.33 to generate every $1.00 of revenue.
7) Financial Ratios: Profitability Ratio
Lastly, we have profitability ratio: profit as it compares to revenue. To calculate this you take your net profit and divide it by your total revenue and then multiply it by 100 to get your profitability ratio percentage. This tells you, of all of the money your facility is bringing in, how much of it is profit that you are getting to keep. The higher your profitability ratio, the more money your business is keeping.
Tracking these metrics on a regular basis will help keep you in the know about the ins and outs of your business and could be what takes you to the next level. Don't miss an opportunity to grow and thrive because you are in the dark.