There are metrics to review for every business as you evaluate what worked and didn’t in 2020.
The New Year brings a chance at a fresh start. A chance for tackling new opportunities and goals, while improving things from the previous year. An annual plan for a business is the roadmap that will set the pace. But many organizations make the mistake of setting goals without fully reviewing the year that’s ending.
It’s not only a good idea, but crucial to understand where you sit before making any gesture at the future. A solid financial review, for instance, checks critical metrics as a company. It ensures you’re;
- Managing finances prudently
- Meeting any obligations (taxes, investor updates, debt management)
- And how close you came to achieving previous goals
Every company (including early-stage startups) should do a review, at least once a year. It doesn’t matter how unique, fast-growing and well-funded you are. But there are countless financial metrics, which ones should make it on your list?
Here are the 4 important metrics for every founder.
1. Budget vs. Actual
What did you expect to spend versus what you actually spent? And how much did you bring in versus goals or projections?
You must compare your company’s budget (hopefully created last year) and compare it against the financial performance for that year (the “actuals”). Technically, this is called a budget-to-actual-variance analysis.
The budget variance is the difference between budget numbers and actual numbers.
A great indicator of a well-run business is one that has a limited difference between what’s expected and what really happened. There are exceptions. For example, if the company experienced an unexpected uptick or downturn, outside of your control. That said, it should be accounted for. (If you see a 10% increase in sales, it’ll likely cause a similar bump in expenses.)
Why Budget vs. Actual is Important
Scrutinizing and itemizing purchase and sales trends gives valuable insights into the performance of each specific aspect of the company. A detailed analysis and report will offer you the variations as well as the reasons behind them.
Use this metric review for a few things:
- Uncover problems (misallocation of resources, headcount too low/too high, etc.)
- Consider reasons for every success and failure
- Correct pricing or issues in marketing and sales
- Identify the products/services you should focus more on or abandon all together
Most importantly, the process of creating and analyzing a budget variance report is critical for business planning, more so, making realistic budgets in the future. A solid understanding of what happened in the previous years means more informed decisions on budget alterations, spending policies and goals.
2. Customer Acquisition Cost (CAC)
It costs something to acquire customers. Advertising, sales reps, content and so many other channels bring in leads. Sometimes, companies don’t aggressively calculate customer acquisition cost (CAC).
It’s a problem when you spend more to acquire a customer than the company hopes to gain through sales. Simply put, a business model failure occurs when CAC exceeds the ability to monetize/convert customers.
Why a CAC Review is Important
Looking at CAC gives you a clear perspective on how much (on average) you’re making from one customer vs. money spent getting them to buy. If you’re a funded startup, it’s still important to know how much acquisition costs.
When the pricing of your product and even the model of the company itself is in a fluid state, knowing about how much it takes to bring in new revenue plays a vital role in decisions to pivot.
CAC calculations are plagued by other problems, such as entrepreneurial optimism. Believing that you have a very interesting and compelling product can lead you to underestimate customer acquisition costs.
A few ways this happens:
- Complicated products that require a longer buying cycle
- Over-reliance on viral marketing and growth tactics that may not pan out
- Underestimating the need for sales outreach to find ideal customers early on
A solid CAC review confronts reality with optimism and sets the stage for better progress in the coming year. Use your review to:
- Balance marketing budgets by checking your return on ad spend (ROAS)
- See if you need more or less human interaction via sales reps (Generally, customer acquisition costs increase rapidly if there is a need for human touch to convert leads)
- Find out the length of your buying cycle and gauge ways to speed it up via more touch points, content or better calls-to-action
In a nutshell, revenue per client should be greater than customer acquisition cost for a viable recurring revenue model (subscription model) or SAAS model.
Honorable mention: Gross profit margin is another solid metric to review. It’s done by taking gross revenue and subtracting the cost of goods sold (COGS).
3. Customer Lifetime Value (CLV)
You should also look at the customer lifetime value (CLV or sometimes LTV). Essentially, it’s the amount of profit each of your clients bring into your business (on average) over the time they buy goods/services from you (again, on average).
CLV is calculated after removing all expenses (like COGS and shipping). CLV calculations can be complex because of the multiple expenses involved, including marketing. It’s the perfect compliment to acquisition cost.
Example: If new customers have a $300 CAC and the average CLV is $1500, that’s a 5X return for each new client.
There are many ways of calculating CLV. If you’ve never tracked it, do a quick calculation by multiplying customer value with the average customer lifespan.
Combining these metrics (CLV:CAV) will give you a good idea:
- How much you should be spending to acquire customers and remain profitable
- Whether or not your pricing needs to be augmented
- How attractive your startup may be to investors
Honorable mention: Churn rate is a non-negotiable metric for Software-as-a-Service (SaaS) companies. If you’re in software, you likely already track it monthly.
4. Cash Flow
Another important but commonly overlooked metric is cash flow. You need to review cash flow statements — even if you’re not profitable. This metric shows how money moves in/out of your business. Cash flow is also important for business planning purposes, figuring out when you’ll be profitable and showing how responsibly the business is growing.
Quick Cash Flow Breakdown
Inflows occur in the form of revenues from selling goods and/or services, while outflows occur in the form of operational expenses. In a given month/quarter/year, it’s matching up what you bring in and compares it to what goes out.
Cash flow is also an important part of your accounting and bookkeeping process. And while financial documents like ledgers, journals and balance sheets are invaluable tools for recording business performance — tracking cash flow is critical to the future of your business.
- It’s a fiscal health check ensuring smooth business continuity in day-to-day activities
- Vital when emergencies arise calling for drastic measures
- Highlighting problem areas (overspend, underperformance)
- Forecasting the future and using that data to make big decisions
Important side note: Suppliers tend to do business on a cash basis when dealing with startups. Running out of cash flow could mean running out of inventory, payroll, etc.. This is common practice up until the startup develops a credible record.
Analyzing cash flow shows the health of your business, right now. There’s really not a more beneficial metric when it comes to planning the next year.
A good cash flow review helps:
- Develop proactive cash flow management plans
- Create projections that ensure you meet all your operational costs in time and still have enough resources left for emergencies
- Give clarity when making future investment decisions such as expansion
- Make it harder for your business to fail in the coming months
Don’t Plan for 2021 Until You’ve Analyzed These Metrics to Review
There are hundreds of metrics, financial or otherwise. Many of them are helpful (some more than others). The four on this list give the best snapshot of your company’s marketing, sales and financial status. Look at them, see what happened and use it. Here’s to another year of your business.