Small and medium-sized businesses make up the bulk of all Australian enterprise. But, while most operate in a similar way to big corporates, small business owners have unique concerns when developing a strategy for success.
The key element of a successful small business strategy is finance. Small business owners need a laser focus on the finances of their day-to-day operations to ensure a sustainable and profitable enterprise.
Monitoring these key finance metrics should be top of mind, and can lead to better decisions that will ensure business longevity:
Cash flow is the way money comes in and goes out of a business. Cash that flows in might come from sales or services provided and paid for by customers or clients. Cash that flows out includes expenses relating to staff wages, purchasing, rent, and tax. Understanding the cash flow of your business is essential in remaining profitable.
Tools including balance sheets, income statements and transaction records can help interpret how money is moving within a business. A cash flow statement brings this detail together and provides analysis on how well a company is managing its cash flow and debt structures. Cash flow is integral for a company’s survival, and should be top of mind for any business, especially those looking towards growth.
Profit margins indicate the degree of effectiveness a company has in making money. Profit margins are generally calculated based on how many cents on a dollar a business made after all expenses and costs were considered.
Different types of profit margin can be used to assess the overall success of a business. An example is a gross margin, which accounts only for sales revenue in and direct product costs out. This profit margin does not account for some additional expenses, such as advertising costs or taxes. It is therefore going to be higher than the net margin, which is what a company makes after all expenses are paid.
Profit margins can indicate issues with pricing being too low or overheads being too high. Like cash flow, profit margins can be improved by reducing costs and increasing revenue.
Accounts receivable turnover:
Used to compare companies within the same sector to judge performance, an accounts receivable turnover ratio indicates how efficiently a business is in collecting payment for a product or service.
An efficient business receives owed funds from clients faster than an inefficient business, which is in effect extending short term loans to clients without receiving any benefit.
This metric is important to track for small business owners as it indicates how your business is making or losing money from an operational sense. It could also help identify customers who are making your business unprofitable.
Streamlining billing management can help improve your company’s accounts receivable turnover ratio.
Customer acquisition cost:
Costs such as marketing, advertising, and other tools used to attract customers into a business make up the customer acquisition costs for your business. Tracking how much your business is spending in this area, compared with how many new customers you are accruing and what your average customer value is, can indicate how effective the spend is in helping to drive sales and build a loyal customer base.
Ways to calculate these costs can include measuring the before and after impact following a new marketing campaign. How much did your business spend vs how many new customers did you acquire and how many sales resulted?
This metric has become easier to track with data-led marketing campaigns on social media and the digital advertisingInternet and can be calculated by dividing the amount of money spent on marketing with the number of customers acquired.
Lifetime customer value:
Closely related to the customer acquisition cost is the lifetime customer value metric.
Once a business has retained a new customer, calculating the value they bring over the period they will stay with you can help indicate the type of customer who is going to be most valuable to your business. This future-thinking metric values the long term client over a “quickly won, quickly done” customer, who may have been cheap to attract but doesn’t increase revenue over time.
Knowing what kind of customer will stay with your business for a longer period can help drive down customer acquisition costs by giving you the information you need to target one type of consumer over another and where to funnel your marketing budgets most effectively.
While these finance metrics provide essential information, it can be challenging for small business owners to navigate and interpret them effectively. This is where Geared can be a valuable partner. With our help, small business owners can gain the insights and guidance they need to make informed financial decisions that will drive their businesses towards long-term success.
If you would like to know how a Business Loan can help your business, visit our Business loans page, call us on 1300 828 567 or request a call back.