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3 metrics you are focusing on that may not help improve your business – Revenue, Profit, Growth

Profit and Loss

Here are some metrics that are good metrics but sometimes business owners rely too heavily on them instead of really trying to improve the business.  Having a healthy business means that it is a sellable asset.  If you are a startup it will be different than a small business as they have different exit criteria.

A red flag I hear from perspective clients is “our revenue is $xxx”.

This is a red flag because unless you are a high growth venture backed startup your revenue doesn’t matter.  Revenue is a way to describe how big your company is and you can use it as an approximation of what your expenses and number of employees are.  Because it is a good way to tell people how big your company is some owners think that it is the most important metric to track.  Some people even think that when they sell their company that it will be based off of the revenue because maybe they heard about a startup selling for 3X revenue.  Hopefully you will see that there are more important things to understand.  As an example which company would you rather own –

  • A $100M revenue company that loses $10M in cash each year
  • A $1M that generates $500K of cash every year

Unless you have $10M of cash to invest in the first business every year it is pretty much worthless.  It doesn’t matter what the revenue is and if that was your business and the $10M loss was related to operating and not investing in the business then you would probably close the business as soon as you could because no one would buy it.

Profit is Important but Cash is better

Notice that I said CASH and not Profit in the example above.  This brings us to the next myth that the profit is the most important.  In my opinion cash is truly king if you want to have a successful business.  If companies are structured as an LLC and pay through owner draw it is easy to show a profit of $50K on the Profit and Loss statement but if they paid themselves $100K in owner draw then the company actually lost $50K of cash for the year.   I have had more than a few owners express this frustration of getting a PL statement that shows that they are making money but in reality, their business bank account is decreasing, and the company is losing cash.  I think the common problem is it is easy to get a PL report our of quickbooks and understand it but it is much harder to understand the statement of cash flows or to understand the cash flow, which is what a really good bookkeeper, or a controller or fractional CFO can help with.

Growth is good right?

And the last metric that people like to brag about or talk about is growth.  Our business is doing awesome – we doubled last year.  This is a little bit of a repeat of revenue because when they are talking about growth, they are usually referring to revenue.  Growth is usually good for your business but there are a lot of cases where the number one reason that companies fail is that they grew too fast.  Sometimes it’s because their growth was not sustainable or profitable.  Sometimes it’s because their operations team could not keep up with the sales team – this is a common problem this year in 2021.  There are so many firms that are having a hard time hiring and retaining staff after the covid 19 pandemic.  Sometimes the growth is only temporary – I have seen it where companies acquire the wrong customers and they think they are growing but the customers do not stay long and they churn or leave.  That being said Growth is important and we even it have it as a blog category – just make sure you are thinking of it in terms of long term cash flow and building a healthy business.

Cash Flow, Churn, Margins, Cost to Acquire a Customer, Lifetime Value are a few metrics I like

I think the metrics you track should be based on your 1 – 3 – 5 year goals.  They very well may be revenue and growth to get to those goals but hopefully you will start to focus more on cash flow.  I have seen many companies try to sell their business and only the ones with healthy cash flow were successful.  There are a lot of metrics that will drive cash flow and that is where I would start for metrics to drive the business.  As an example think of a business owner that says we reduced churn by half last year or our margins improved by 10%.  Those sound like businesses that are headed in the right direction instead of one that spent a ton on marketing and grew revenue only to have them churn a few months later.

One metric I like is the ratio of your lifetime value of customer vs your cost to acquire a customer.  Hubspot and other marketing companies would say that the ratio should be over 4, which would mean if it costs you $100 to acquire a customer you will receive $400 of revenue or a profit of $300.  The only tricky thing is it is really hard to calculate your cost to acquire and lifetime value.  A fractional CFO can help by making assumptions around churn.

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