By Salim Omar, CPA

Most accountants will only keep track of historical numbers like gross sales, gross margins and net profits. While these can be useful, there are other equally or more important numbers that should be kept track of that most old school accountants are not aware of. You cannot improve factors that you cannot measure within your business.

The sad fact is most business owners have no idea what their numbers are. And that means theres no good reason they should expect their business to improve because they lack a way to measure the results!

Perhaps the most important financial indicator to know is the net cash flow of your business on a monthly basis. When cash runs out, the business most likely has to resort to closing its doors. If cash is termed by many as king then net profit certainly deserves the title of queen. To illustrate its importance, heres a personal example. I work really hard, but I stopped working for free a long, long time ago. I insist on generating profit. I track and measure it constantly. Im very big on keeping score. Im also very aware that bigger is rarely better, unless running a company up for sale or a public offering.

Very few small business owners spend enough time analyzing, what parts of their businesseswhat services.what clients.what geographic territories.etc., are most (net) profitable vs. least (net) profitable. They let low profit stuff consume the same resources as high profit stuff. They over spend money in overly fancy offices, addresses, staff, etc to impress people without profitable purposes.

The two important questions that should be asked are:

How does this contribute to NET?

How much does this contribute to NET?

Every justification I hear for wanting to do things with little or no net profit are invalid.

The other financial indicator that many small business owners dont do an adequate job of understanding and tracking is the lifetime value of the customer. The lifetime value of a customer is one of the most valuable things you as a business owner can know. It is the total profit of an average client over the lifetime of his or her patronage.

Example: Lets say that your average new customer brings you an average profit of $100 on the first sale. He or she repurchases three more times a year, with an average profit of $150 on each reorder. Now, with the average patronage lasting two years, every new client is worth $1,000: {$100 + (3 x $150) + (3 x $150)} = $1,000.

Why is this calculation so important?

By knowing what the value of an average customer is, you can then determine two things:

– How much you can afford to spend to acquire a new customer

– How much you can afford to spend to keep an existing customer from leaving you and purchasing from a competitor.

The other extremely important number is the total cost per lead. Most small business owners dont know what this amount is for their business.

Let me give you an example: If you spend $500 on an advertisement in a magazine and that ad generates 5 qualified leads, then your cost per lead is $500/5 = $100 per lead. Once you know this number, it enables you with the ability to measure and compare the ROI from each advertising initiative you do.

From the above example, if you convert two customers, a 40% closing, then your cost per sale is $500/2 = $250. The cost per sales is the other indicator most small business owners dont keep track of. If the lifetime value of your customer is $1,000, would you spend $250 to get that customer? How about $500? How about $750?

The response should be a resounding yes.

You would find all the media out (some examples of which are coupon advertising, direct mail, newspaper, Internet, etc,) that would allow you to do that.

Here are three other financial indicators that you should measure and keep track of:

1. Average transaction size or average client fees per year: Once you know this number, you can find ways to increase it through up-sells, cross-sells, price adjustment, etc.

2. Number of customers for the day / revenue of the day: Another important number to keep track of.

3. Capture of names/addresses/birthdays of new customers: A prospect may not purchase from you today but because their name is in your database and you are keeping in touch with them, they may become your customers in the future. By collecting pertinent information, you can keep in touch with your new customers and prospects.

Unfortunately many small business owners I talk have not identified the key financial indicators in their business, hence cant measure and improve on them.

About the Author: Salim Omar, author of

“Straight Talk About Small Business Success In New Jersey”

specializes in providing accounting and tax services to small business owners and professional practices in NJ. Salim’s articles are featured in various national magazines including Accounting Today, The CPA Journal, Chiropractic Economics, Wealth Manager and The Two River Times. You may request a free copy of Salim’s new special report titled

“How To Drastically Reduce Your Taxes By As Much As 62% This Year Alone And Put Thousands Back In Your Pocket”

Source:

isnare.com

Permanent Link:

isnare.com/?aid=334845&ca=Business