So you have a high-quality product. But is your business actually profitable? Global Resources LLC once worked with Dave Alwan, a specialty meat caterer. Dave had a great product but did not know how to measure the costs of his business and understand how profitable it was. This is a common issue among business owners who are new to finance. Here are the most important profitability measures that you should be aware of as a small business owner:
Sales Revenue: This is a rather simple metric everyone understands. Sales revenue is the money you make selling your product. Sales revenue should match the rate of growth. You should never look at how much you are generating by selling alone. The sales numbers should be compared with costs of acquisition (mentioned below), growth rate, and other numbers to make sense of it.
The Cost of Acquisition: The CAC refers to how much money you spend on getting (or acquiring) a new customer. When you buy a new ad for your company or get new inventory, all these add to CAC. CAC should be matched with the number of customers acquired.
Gross Margin: This is a more precise measurement of profitability. It’s measured as a ratio or percentage of how much revenue is retained after spending costs. A small gross margin shows a company that is not growing as it should. A gross margin that is too large could indicate a company that is growing beyond its capacity.
Profit Margin: This is a calculation of all the costs of your company compared with earnings. The profit margin takes into consideration even small expenses like how much it costs to buy printing paper. It’s a reliable indicator of where your company’s money is going.
In addition to the above, you should also calculate productivity levels, consider customer retention numbers, and also lifetime value of a customer. For Dave, consultants at GR-US.com built a sophisticated system to calculate finances and understand metrics mentioned above. If you are not a finance expert, doing so at a small business can be difficult. If you require any help, Global Resources is ready to assist your business.