Business Analysis
A Guide to the Key Measurements for your Small Business
Managing a successful small business involves measuring and analysing performance. This article shows small businesses what to measure.
The actual things a small business needs to measure depends on the business itself, but as a general rule the measurements will fit into these categories;
- Cash – businesses generally don’t go bust because they don’t make enough profit, they go under because they can’t pay their bills.
- Sales and marketing – a business can’t earn money without sales but it can be a long process involving prospecting, then managing leads through to sales before finally selling more to existing customers.
- Production – if you sell products then you will have to buy stock and sell enough finished product to make a profit. If you sell services, you need to make sure you provide enough to cover your costs.
Lets look at each of these in more detail.
Cash
This is the domain of accountants but rather than give you a scary list of accounting terms, there are some simple concepts you can apply. You need enough cash in the bank to cover your bills, both now and in the short-term future. Keep an eye on how much you have and your liabilities – the money you owe – and make sure the former is larger than the latter.
An extremely simple concept, but one that could save you from going under. It’s known as cash management.
Keep an eye on both the number of sales you make and the profit per sale. To calculate the profit you also need to know your costs – so make sure you know how much each product or service costs to manufacture, deliver and service.
Sales and Marketing
Purchasers go through a process from general browsing to an enquiry, then possibly a more in-depth discussion before finally purchasing. Identify how many people are at each stage and how many of them move through the different stages. This is known as the conversion rate.
Knowing the conversion rate means you can see quite clearly where you need to improve and where you need to focus your efforts. For example, if you are excellent at converting leads and enquiries to sales then your key focus needs to be on getting more enquiries, which you might do through advertising.
Alternatively, if it’s the other way round then you know that you need to improve your sales techniques.
Make sure you measure the acquisition cost and the amount of money spent on each activity. Cash management will tell you if you can realistically afford an activity or not.
Production
You should know your maximum capacity to avoid over-reaching yourself. If you can’t meet orders you’ll start to lose customers and probably find your costs increase. Besides, you’ll also be too busy to enjoy life.
Also look at returns and complaints levels, so you know whether your standards are increasing or falling. Falling standard ultimately means less customers.
There are lots of individual things within these categories that you can choose to measure. Select the most appropriate for your business.
Business Link is a UK-sponsored website resource for small businesses that has lots of tools you can download to help with cash management or obtain advice. If you’re planning on using advertising to help grow your business, read Measuring Advertising Results for more guidance.
