You are most likely monitoring several key performance indicators to determine how well your company is doing. Whether related to your finances, advertising, employee turnover, or website traffic, these metrics can be an effective way to measure, maintain, and improve your business’ success and growth.
That said, there are a number of metrics vital to a company’s long-term success that many business owners overlook or fail to track properly. But ignoring these numbers can keep your company from achieving its full potential.
With this in mind, here are 3 critical but often-overlooked metrics all business owners should keep a close eye on. If you need support in tracking these metrics or setting up the business systems that allow you to track them, consult with us, your Family Business Lawyer™.
01 – Employee satisfaction
While most business owners understand that employee satisfaction is important, most don’t realize just how critical it is. In fact, some business experts rank employee happiness as the single-biggest driver of a company’s success.
This makes sense, seeing that happy employees are not only more productive, but they also typically deliver better customer service, which can lead to increased sales and repeat business. On the other hand, unhappy employees can result in slow or lost sales, as well as decreased levels of customer satisfaction.
Not only that, but a satisfied team leads to less turnover, and employee turnover is among the costliest of all business expenses, especially when you factor in the costs of recruiting, hiring, and training new staff. Given these correlations, tracking both employee satisfaction and turnover costs can be an effective strategy for achieving sustainable growth. When employee satisfaction increases, your turnover costs should fall. One of our favorite resources for tracking employee happiness and understanding employee satisfaction is a tool called 15five. Check it out and see if it helps your business monitor team satisfaction.
The bottom line: If you start by making sure your employees are as happy as possible, many of the other factors affecting your company’s productivity and growth will usually fall into place on their own.
02 – Cash conversion cycle
One frequently overlooked financial metric is the cash conversion cycle (CCC). Your CCC tracks how quickly your customers pay you, compared to how long it takes you to pay your suppliers.
According to Harvard Business Review, Jeff Bezos at Amazon has mastered the CCC, which frees up tons of cash that he can invest however he wants. When it comes to cash flow, what matters most is not necessarily how much revenue you generate, but when the money actually changes hands.
As the above article on Bezos points out, the basic CCC equation works like this: If your customers pay you quickly, you manage your inventory well, and you are able to take your time paying your own suppliers, your free cash flow can be consistently positive, even when your net income is not.
CCC is easy to calculate, and it’s a good measure of your free cash flow:
- First, determine the average number of days you hold inventory.
- To that number, add the average number of days it takes for your customers to pay you.
- Finally, subtract the average number of days it takes for you to pay your suppliers.
The lower your CCC number, the better. Back in 2013, Amazon had a record CCC of negative 30.6 days. However, getting your company’s CCC into the single digits is an ideal target to shoot for. Generating such numbers often requires incredibly efficient inventory systems, flexible terms for your suppliers, and encouraging your clients/customers to use speedy payment options.
If you need support with any of those areas, we’re here for you. In fact, putting these business systems in place is one of the primary services we offer our business-owner clients.
03 – Profitability per product or service
Many business owners assume that selling their most expensive product or service should be their top priority. But sometimes, the most profitable thing to sell is less expensive. In light of this, by tracking your profitability per product or service, you can figure out which ones are making you the most money.
If your business primarily sells products, first determine the true cost of each product compared to how much you are selling it for, and then check the average price your competitors are charging for similar products. Products with the highest gross profit margin (revenue produced by goods minus the cost of those goods) are the most profitable.
Just make certain you are tracking the gross profit margin accurately to find out which products are your top sellers. In some cases, you may need to increase prices on certain products to make a profit or stop selling other products altogether.
For service-based companies, it can be a bit more challenging to track profitability, unless you charge by the hour, as opposed to charging on a per-project basis or by the month or quarter. To see how well your time is being spent, carefully track each service you offer, breaking down how many hours your team spends delivering it, along with its costs in terms of employee overhead and other related expenses. To do this, you’ll need a clear picture of exactly what goes into providing each service you offer, so you can determine which services are your top money makers—and which ones are losers.
Keep in mind, sometimes a company will offer a service (or product) that loses money in order to attract new clients or ultimately sell something more profitable. This strategy, known as a “loss leader,” can be a great way for a new business to introduce itself to the market, build a loyal customer base, and secure future revenue.
We’ve Got Your Back
As your Family Business Lawyer™, we will advise you on the metrics that are most beneficial for achieving sustainable business growth. Moreover, you should factor your legal, financial, insurance, and tax (LIFT) expenses into the above calculations to get the most accurate measurements.
We specialize in creating effective legal, insurance, tax, and financial (LIFT) systems for small businesses like yours, so your company has a rock-solid foundation upon which to grow. Meet with us, your Family Business Lawyer™ today to streamline your business systems and operations, so your company can reach its full potential and create a lasting legacy for you and your family. Call us today at 754-253-8825 to get started.
This article is a service of Michele Hyndman, your Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Schedule a LIFT Planning Session or call us today at 754-253-8825 to schedule.