“What’s measured is what matters,” is a common refrain in business. Tracking your business’ progress is certainly important. But how do you know what points towards success?
Metric 1: Your customers are satisfied.
The conventional approach to measuring customer satisfaction is to use surveys or focus groups, but you can also just talk to customers when they call or visit (if you have a brick and mortar location). Simply talking to people and understanding their opinion of what you do is extremely underrated and relatively easy to accomplish. If customer satisfaction is wavering, you need to listen to the pain points that are being expressed, and respond by fixing them.
Metric 2: You can read the market well.
There's an old saying: the market is never wrong. No matter how great an idea may be, it needs to be financially validated by the market in order to be worth pursuing. Don't put your ego ahead of the market -- or your business will suffer dramatically. This is less of a “trackable” metric, and more of “You know you’ve arrived when you’re playing the market well” kind of deal. You think Warren Buffett has $83B because he never tried to read the market? Hint: he reads the market hourly.
Metric 3: Your earnings are stable.
Earnings stability is a measure of how consistently those earnings have been generated. Stable earnings growth typically occurs in industries where growth has a more predictable pattern. Earnings can grow at a rate similar to revenue, usually referred to as top-line growth, and is more obvious to the casual observer. Earnings can also grow because a company is cutting expenses to add to the bottom line.
Metric 4: You’re seeing a return on equity.
Return on equity (ROE) measures the effectiveness of a company's management to turn a profit on the money that its shareholders have entrusted it with.
ROE is calculated as follows: ROE = Net Income / Shareholders' Equity
ROE is the purest form of absolute and relative valuation and can be broken down even further. Like earnings growth, ROE can be compared to the overall market and, then, to peer groups in sectors and industries. Obviously, in the absence of any earnings, ROE would be negative. To this point, it is also important to examine the company's historical ROE to evaluate its consistency. Just like earnings, consistent ROE can help establish a pattern that a company can consistently deliver to shareholders. You may not have any shareholders at this point, but it’s still good to understand where your ROE might stand.
Metric 5: Your profitability ratio is high.
One of the best ratios to measure is your profit margin. This involves taking your annual net profits and dividing it by your annual sales. So, while you may be generating sales, your profit margin could still be low depending on your pricing structure, startup costs or other factors. Your profitability ratio is considered healthy when it’s on the high side.
Bonus: Your employees are satisfied.
Take the pulse of your employees. There are dozens of tools out there these days to help you do that, from quick and easy “pulse surveys” to a more conventional annual or quarterly survey on where people stand. If people actually like working for you, it’s a huge strategic advantage. Measure that as a success because happy employees often lead to a more positive customer experience.
Data is crucial to the modern age. But rather than simply collecting a bunch of information, you need to know what it means and how to use what you learn from it. Small business success metrics look different than enterprise success metrics, but some similarities persist. Know what to measure and what to learn from it, and you’ll be on the right track.