8 small business principles and metrics to track and measure growth
I recently read an interesting article from Bernard Schroeder, the Director at the Lavin Entrepreneurship Center, San Diego State University, and Forbes contributor about “what metrics really matter to make a small business successful 8 guiding principles”, which he brought up some useful points for startups to keep in mind. For many people, founding and running a small business or startup is considered part of the capitalist American dream. And with all the success stories such as the in home stationary spin bike that offers live streaming video classes company who raised multiple venture capital rounds, and grew to 4 billion dollar market cap valuation in 6 years and managed to IPO last September on the Stock exchange, there are plenty companies that do not make it. Last March I wrote a post called the “top 11 reasons startups and small businesses fail” which covers the top trends from a CB Insights reports of analyzing 101 reasons that startups went bankrupt.
As my San Diego based CPA firm offers strategic growth advisory and out-sourced CFO consulting to small and medium sized businesses and I have seen a number of metrics and things small business need execute on and pay attention to grow their companies into financial success. Hiring the right people in data science analytics, business or sales development, marketing or product engineering can be crucial for reaching new customer acquisitions, increased market-share and the ultimate product-market-fit.
Mr Schroeder explains in his article “I leaned in to really learn how to sell something for above market value, to comprehend product or service gross margin, what business expenses you easily see and those which are hidden, and the most important thing of all, to really understand and manage cash flow.” he also goes on to say “It’s one thing to want to start a company based on an idea (not so good) or a problem (better). But do your due diligence by first learning the business financials and metrics by studying other similar businesses or your business might fail for all the wrong reasons.”
So if you have the proverbial entrepreneurial bug or itch and want to start a business its a good idea to have an understanding about these 8 metrics and principles that you should follow and track your progress in each of these areas.
1 Identify key business metrics
What I’m talking about here is a level of discipline and skill necessary to collect and analyze the relevant business data, known as metrics. Also known as key performance indicators (KPI’s) for your business. It is useful to track them and have an understanding of why they move up or down, so you can use it to make better business decisions to fuel your startup’s growth. Mr Schroeder says a startup should start with tracking at least five: “revenue, total gross margin, cash flow, accounts receivable (money owed to you), accounts payable (money you owe). Figure out a way or a tool to use to track this weekly. That way, you will avoid being surprised.” I say you also should keep an eye on sales revenue, cost of customer acquisition, monthly profit & loss, overhead costs and variable cost percentages.
2 Manage your cash flow
According to the CB insights report of top 20 reasons startups fail, and besides the number 1 of “no market need” the 2nd reason is “ran out of cash” not lack of profits. So it’s imperative to do cash planning, days cash on hand is good metric, and having a solid grasp on the expenses and decisions that affect your cash flow. Small businesses are fragile. Without large customer bases and substantial cash reserves, entrepreneurs can find themselves with no alternative to pulling the plug. In theory you could launch the company and be so successful, you might not have enough cash on hand to keep up with demand and order additional inventory or to provide the services or new hires necessary to support your customers. You hear this quite often on Shark Tank when one of the shark investors asks why the startup is wanting to ask for money. But the opposite is also true according to an article in Fortunly “Another way cash flow gets disrupted (and the business failure rate gets hiked up) is by stocking up too much inventory. The bills don’t wait for your products to get sold.”
3 Lean startup principles
As I mentioned before that a lack of cash is a big reason that small businesses fail, but by adapting a lean mentality, you can get more creative and learn to find ways to avoid paying for things that not absolutely critical to your business. How many times have you heard of a successful business that was started in a garage (Google), in an apartment (Airbnb), in a Dorm room, (Facebook) at a friend’s business and so on? The reason you heard it is because its true. Keeps your costs and resources as lean as possible in the early days.Doing so will free up cash flow. Sometimes its called “bootstrapping”, the process of building a company from the ground up with nothing but personal savings in the beginning (no outside investors yet), and with luck, the cash coming in from the first sales.
4 Understand your gross margin
You do not have to be a professional CPA or a finance major to understand gross margin. If you sell a widget for $100 dollars and your direct costs are $40 dollars, your gross margin is the difference which in this case is $60 dollars. Next you have to add up all of your indirect costs, which could be payroll, labor, rent, taxes, software, etc, to get to your net profit metric.
So as Mr Schroerder points out “that before you even start your business, you should research and understand the marketplace, trends and your target customers to see if they would be willing to pay for something that will give your business a good gross margin. Without the cash flow from a good gross margin, it may be impossible to run the business.”
5 Culture and your company’s mission, values equals talent
Have ever spoken to someone that works at Google, Airbnb, Warby Parker, Salesforce and other disruptive companies and wondered why is the enthusiasm so strong and almost cult-like?
How do you spark, build and maintain motivation in your startup or growing small business? It could be motivated by stock options and the chance of cashing in on an IPO, but more times than that it is built and nurtured into the company’s culture and purpose. I wrote an in depth article on this subject called “How to keep your employees motivated-like Google, BridgeWater Associates“, where i point out that the 4 keys to employee motivation boils down to:
You from the beginning you need to be thoughtful about what kind of values you will manage your business by and the culture you will try and build within the business. That will help you recruit people who believe in the same values and will contribute to the core culture. People like to work for businesses that are more than just a machine for making money. That doesn’t mean that you can’t have sales goals, and profit goals; it just means that your employees will work harder and be more loyal if they feel like they are contributing to a greater mission. Mr Schroeder stated “don’t hire anyone, regardless of talent who does not believe in the value, culture and mission of the company.”
6 Get feedback and actually talk to your customers
This may sound obvious and straightforward, But once you launch a business (it maybe a service or product), unless you have conversations, get feedback, and interactions with your customers, you can lose sight of this important aspect of your business. Some business owner tend to focus on “shipping products” versus satisfying customers. One solution is to utilize simple survey techniques to continually gather customer feedback. Look for opportunities to talk to real customers at tradeshows, events, conferences, or have customer success manager hop on a call with them to how they experiencing the product or service. Audi the German luxury auto dealer does a decent job of following up each time you bring your vehicle for serving with giving you call and text to find how the experience was with their brand.
7 Marketing has to equal sales
Many small businesses do not always get that we are living in digital world, and that marketing is not optional, it is a necessary investment when done correctly such as SEO and content marketing it can pay off in ten folds in ROI by bringing qualified leads or sales. Meaning marketing is not some cool or fun thing you do to see your business in some ad or promotion. It needs eventually to drive sales. And in the early days of the business, when you don’t have much cash flow, you will need to rely on free and organic ways to drive your marketing with blog posts, social media, videos, word of mouth, etc. When you do talk to customers, ask them how they find your business. Such as asking “how did you find me?” So then you figure out and start to give attribution to tracking which marketing tactics are driving leads, prospects, conversions and sales
8 Research your competitors
In the age of the internet you can think competitors in two ways, there are the direct competitors such as for me would other boutique CPA firms in the San Diego or La Jolla area, right? But also in the age of Google, your competitors are anyone that is ranking above you for a specific search phrase that you are trying to target. You always need to keep an eye on your competitors, and study what they are doing, how they market, what their pricing is, etc.
One easy and free thing you can do is to set up Google Alerts on each of your major competitors. That way Google will send you an email each week on anything your competitor has published online or when they appeared in an article. Mr Shroeder brings up a relevant point by saying “you may be unique in your town, or in your industry and not have direct competitors but that doesn’t mean you don’t have indirect competitors. Costco is your friendly warehouse store partner until they Kirkland you.” Kirkland Signature is Costco’s own store brand that competes competitors producing and selling similar products at cheaper pricing. Amazon, Google do this to so many companies. Just read what happened to Sonos.
Telling your friends and family that you are starting a business is the easy part. Building a business is much harder but rewarding. If you are going to try and create a successful business, know what you need to focus on and understand the key principles of the business that will help you hedge your bets to actually surviving, and hopefully, one day thriving. Growing and running a successful startup business is not a gut feeling it requires a thorough analysis on the work, sales, and financial results. And it can’t be done without tracking relevant business metrics.