One of the best things about owning and running your own small business is that you get to go to a job you love and care about every day. While it can be easy to get caught up in the excitement, it’s not always fun and games. If you want your business to succeed, you need to be tracking and measuring actual performance to ensure you are doing well. The end of the year can be the best, and possibly most important, time to do this, because it gives you the opportunity to look back on the past twelve months and evaluate progress. Here are some key metrics that you should definitely check in your year-end review:
- Sales Revenue | Measuring sales revenue tells you one of the most important things a business owner needs to know – how much money did you bring in? This is a key indicator in determining if your business is doing well. It also plays a role in calculating other metrics such as profit margins and marketing ROI.
- Expenses | Expenses are broken up into two categories: variable cost of goods sold and fixed overhead expenses. Your variable costs tell you how much it costs to provide your product or service. Each of these expenses should be broken down into per unit cost to provide you with sufficient level of detail for analysis. Your overhead costs are the expenses required to keep your business running. These consist of factors such as utilities, rent, equipment maintenance, and salary. All of your costs must be maintained at a reasonable level in order to attain healthy and reasonable profits.
- Profit Margin | Your profit margin is calculated by subtracting your cost of goods sold from your sales revenue and then dividing by sales revenue. This ratio tells you the percentage of profit you take home at the end of each sale. The higher the percentage, the more money you retain. With this in mind, you want to minimize strategies which increase sales by cutting prices. This will lower your profit margin and in turn seriously (and quickly) increase your breakeven. You could find yourself selling more and actually making less.
- Sales & Marketing ROI | Measuring marketing return on investment (ROI) can be challenging. However, thanks to improvements in data collection, it doesn’t have to be impossible. Your ROI helps you determine which methods and venues are the most effective at bringing in customers, and therefore money.
- Customer Retention | Generally, it costs more to attract new customers than it does to retain them, which is why you want a base of repeat loyal customers. To determine customer retention, you need to know how many transactions were from one-time customers and how many were returning customers. If retention rates are low, it may be smart to take another look at your customer service and marketing efforts.
- Inventory Size & Turnover | How much inventory did you go through in a year? How quickly did you have to replenish supplies? How much inventory was lost? Inventory is one of the most significant assets a small business has. The more you understand the inventory process, the better you will be at reducing waste and costs.
- Functional Time Use | It’s important to understand how much time is spent in all areas of your business. Productive time management is vital when you’re running a business with few people. A functional task analysis will not only allow you to pin-point productivity bottlenecks, but it will also help you create a more accurate time plan for the next year.