Knowing What Business Metrics to Measure

Knowing What Business Metrics to Measure 1
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Knowing What Business Metrics to MeasureThere are 100’s of metrics you can look at in your business from day to day, and many can be great indicators of the success or failure of your business. Obviously, you are in business to make a profit so that should be the number one thing measured, otherwise you have a hobby. Not that being happy and content with the enjoyment of your craft is bad, but as a business, you must eventually turn a profit. Then, you can look at other financial core metrics like cash flow, accounts payable, accounts receivable, direct costs, operating margin, and cash burn rate.

Personally, I go beyond the big picture profit metric and use metrics to keep my company focused as a customer-centric business. To measure this, I use a metric I call the “core partner comparison”. I take the gross profit on the top 20% of our customer base who are those customers who we really love to do business with. The ones that mean the most to our business and who we would love for ALL of our customers to be like. For easy math, let’s say that the gross profit number is 50%. Then, we take that figure and compare the remaining 80% of our customers to it. Those that fall below the 50% mark will get a price increase and we let them self terminate if they don’t like the new costs. Then, go back to the bottom 80% of customers that are the same or higher we have to figure out why they don’t fall in your core partner group. Maybe they don’t order enough so now we have a select group of customers who we need to work more and it makes your sales efforts more focused. Possibly, they are hard to deal with even though you make good money with them. Again, you have to determine if they are worth your time as happiness counts and the customers that drag you down will make it harder for you do the right things with your core partners. I like to review this metric regularly to make sure we are working with the right customers.

At the end of the day, there are hundreds of different metrics that you can and even should be measuring depending on what is important to your company given its life stage. The critical thing here is to set a time that you will continuously review those metrics. These are not numbers to put on paper to show off or give your accountant something to do. Metrics are to be used as guides for corrections or changes for your business to stay healthy and profitable. It’s kind of like stepping on the scale every morning. All good to do it, but what are you doing about the number if it doesn’t represent what you want or need to be healthy.

March 5, 2019

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