Gross profit. Sales revenue. Cash on hand. All of these are important metrics, but they may not be the most important metrics for your business.
When I start working with a new client, I always ask which metrics they track on a frequent basis. I’m often surprised that most people only track a handful, such as revenue (not profit), new customers and sales leads in their pipeline.
When I inquire as to why they track those specific metrics, most people simply say, “That’s what I was told to track.” Not surprisingly, these folks often have a big problem in their businesses because they haven’t identified the metrics that really matter – the ones that strongly correlate to success.
While there’s nothing that makes one metric better or worse than any other, it’s important to keep in mind that the most important metrics in your business will change over time, depending on the company’s stage of development and market conditions.
For example, if business is booming and you’re landing new customers like crazy but you aren’t tracking how many customers you’re losing (customer churn) then you could be ignoring the most important metric in your business and missing the main reason behind a loss in profits.
On the other hand, if your business is steady and you’re tracking revenue but not profit margin per customer, you could be ignoring a looming disaster if your profits start to decline. In this case, if you tracked profit margin per customer and you saw it declining, you could respond with new high-margin offerings, streamline your operations, cut costs, upsell existing customers, etc.
For most small businesses, the following metrics are a great start:
- Revenue per week or month
- Leads generated per week or month
- Profit per customer per week or month
- Cash on hand
- Operating reserve (savings)
With just these five metrics, you can tell how healthy your business is. You can make informed decisions about putting more effort into sales or keeping your marketing strategy the same. You can know how many months or weeks you can operate without any new customers. These are all important considerations when running a business.
So make sure you know which metrics to track and when. Do not assume that you need to track the same metrics all the time. Every stage of your business development requires the monitoring of different metrics that will help you keep track of how you’re leading and how your business is performing.
Don’t forget virtual metrics.
While hard numbers are great, virtual metrics, or soft metrics, are just as important.
One of the metrics I encourage all of my clients to track is their personal stress on a scale of one to 10. For each individual, we establish a normal stress threshold that must require some action if it is crossed.
If you normally operate with a personal stress metric of five and one week your stress rises above that threshold, it requires a conversation and possibly some action. Sometimes, it’s just a blip. Other times, it’s an important issue that needs to be solved and requires a coaching conversation.
In addition to personal stress, I also request that my clients track their personal fulfillment on a scale of one to 10, especially if they run a small business. Why? Fulfillment tracks personal satisfaction and the degree to which clients believe they are living up to their potential. It’s the prime indicator of how much they enjoy their work and the growth and satisfaction it brings to their life.
If a client’s fulfillment metric starts to dive, we both know that something needs to change. Either they need new, more interesting projects or customers, a vacation or a change in scenery. The response is always different depending on the individual, so it requires a critical coaching conversation.
Metrics are the measure of your business success or failure. Make sure you’re tracking the metrics that matter the most and the ones that really inform your business leadership decisions and your personal fulfillment.