Financials for Founders: 4 Key Focus Areas for Business Growth
What metrics are best to evaluate for a growing business? If you intend to grow your business by 30% or more in the next year or so we’ve outlined 4 focus areas for growth-oriented financial dashboards for your next quarterly review meeting.
Like a 4 cylinder car each of these are important. You want to be running on all 4 cylinders.
1. Lifetime Value of Your Customers
In other words, how much money do you intend to make from your average customer over the full lifetime of the business relationship? The are 3 important KPIs within this focus area to measure. The first is the Average Revenue per Customer – which is essentially total revenues divided by number of customers. The next is Lifetime measured in months – how long do customers stick around? And the final is the Average lifetime value measured in dollars – how much profit are you generating from the duration of that customer relationship.
2. Revenue Velocity
The second theme that growth focused Founders should be obsessing about is Revenue Velocity. Growing revenues requires consistency and persistence, and will come down to creating daily habits that keep the focus. Growing the number of customers, the frequency or cadence of transactions per customer and increasing the average transaction price all contribute to more aggressive revenue growth.
Here are 3 important KPIs within this focus area to measure. The first is your Revenue Growth Rate – measured quarter by quarter, or month over month, or quarter compared to last year’s same quarter if your business has seasonal influences, etc. The next is looking at the Customer Growth Rate – using the same cadences just described but measuring the customer count instead of revenue. The third is to measure your New and Expansion Revenue each month, especially if your business is Service or Subscription based model. For exponential revenue growth you’ll want to constantly have your eye on how to drive new revenue from all sources – both existing customers and prospects.
3. Customer Retention
You don’t want a speed boat with a hole in it. It generally takes much more effort and focus to acquire a customer than to keep one but as you grow you will soon discover that focus is also required to ensure threshold satisfaction from existing customers. Your best customers will actually do you the favour of referrals and references so we do want to stress the importance of customer retention programs. Four KPIs that you will want to track are Gross Revenue Retention, Logo Retention and Churn rate. These 3 measure your company’s performance when it comes to sustaining customer relationships. The fourth is Net Revenue Retention – which measures your company’s capacity to nurture and grow customer relationships. Landing and expanding customers is essential when it comes to exponential growth.
4. Customer Acquisition
The 3 previously mentioned focus areas revolved around value derived from customers once you’ve acquired them. This focus area is all about your efficiency and effectiveness at adding new customers. To begin, you should be calculating CAC. This is the cost of acquiring a customer – which is essentially all the sales and marketing spend divided by new customers added. The issue with this metric can be timing. There is generally a lag between when you invest in the initiative and when the prospects convert to customers. By measuring quarterly and comparing trends you should soon see if you are heading in the right direction. If your business is seasonal you may want to compare your quarters year over year. Once you have your CAC you can then go back and grab your Lifetime Value figure from the first focus area and track your LTV/CAC ratio. Lifetime value and CAC measurements have much more meaning when combined in this ratio. You are shooting for a ratio of 3:1 or greater. The final KPI to look for is the payback period – how long does it take for you to earn back the cost of acquiring a customer?
Track these metrics and KPIs quarterly and seek increases in most of the numbers except for the churn and payback period, which you’ll want to see the numbers decreasing. There are also some industry benchmarks that will play a role.
If you want to set these up but aren’t sure how to grab the data or calculate them – our team at Numbercrunch can parachute in and get these set up for you today.
Author: Susan Richards