September 2023 Newsletter
7 Key Performance Indicators (KPIs)
Between running your business 60+ hours per week as a CEO and ensuring your family is happy and healthy, it can be difficult to remember to regularly stop and check on the health of your business. When you think everything is on track because your business is operating in the black and your bills are being paid, it can be easy to forget to check your business "temperature" and make sure you stave off any financial issues that may be festering. More importantly, use these KPIs to increase profits and the value of your business substantially.
Many CEOs will simply check their Profit & Loss statement at the end of the month to assess their company's bottom line: Net Income. However, it is important to look beyond this base measurement to ensure you are getting the full picture of your company's health and your profitability. By understanding additional metrics and key performance indicators (KPIs) with management reporting, you will be better able to make informed decisions for your business to ensure greater success.
So how do you determine or measure the health of your business? Start by monitoring these 7 important key performance indicators:
1. Gross Profit Margin A healthy and profitable business has a high Gross Profit Margin, which can be determined by dividing Gross Profit by Sales. Gross Profit Margin, also known as Gross Margin, varies by industry but it is so essential. Software companies will have Gross Margins of 70% - 85%, digital media companies and other service companies should have 50% - 60% Gross Margins and manufacturing companies will have Gross Margins of 30% - 50%. As a small or mid-size business, improving your Gross Margin should be one of your key goals - increasing Revenue while decreasing the costs to deliver your products and services.
2. Customer Churn and Revenue ChurnCustomer Churn and Revenue Churn are two critical KPIs that need to be tracked for recurring revenue and are so important to sales, profits and the value of your business. The lower the rate of churn, the better. A SaaS company Customer Churn figure should be 1% or less per month or less than 12% per year. It is important to track and improve both Customer Churn and Revenue Churn.
Definitions:
MRR = Monthly Recurring Revenue ARR = Annual Recurring RevenueNRR = Net Revenue Retention
Customer Churn = No. of Customers at the beginning of the period - (minus) No. of Customers at the end of the period (excluding new Customers sold during the period) / (divided by) No. of Customers at the beginning of the period. (This can be calculated for any length period i.e. monthly, quarterly or annually)
Revenue Churn = Amount of Recurring Revenue at the beginning of the period - (minus) Amount of Recurring Revenue at the end of the period (excluding new Recurring Revenue sold during the period) / (divided by) Amount of Recurring Revenue at the beginning of the period. (This can be calculated for any length period i.e. monthly, quarterly or annually)
3. Net Revenue Retention RateAn extremely important metric is Net Revenue Retention Rate. If you don't retain your customers, your business will suffer tremendously. Net Revenue Retention Rate should be monitored monthly and annually. The higher the Net Revenue Retention Rate, the better you are at keeping your clients satisfied and growing your existing clients. Setting goals and tracking customer retention helps to improve your service offering while increasing sales and profits. Software-as-a-Service (SaaS) companies should strive to achieve a Net Revenue Retention Rate over 100% and set a goal of 115% or higher.
Monthly Net Revenue Retention Rate (NRR) = (Starting MRR + Expansion MRR (or upgrades/upsells) - (Contraction MRR (or downgrades) - Churn MRR (lost customer Rev.)) / Starting MRR x 100 (for %) (This can also be calculated annually using ARR instead of MRR)
Net Revenue Retention Rate examples: NRR measures growth from existing customers. Any number over 100% is good, but favorable NRR is in the 115% - 150% range.
Example: Your software company starts the year on January 1 with an MRR of $270,000 and ends January with an MRR of $350,000 (due to $80,000 in upsells) from the existing customers. And your business ends January with $20,000 in Contractions (reduced software licenses) and $30,000 in Revenue Churn due to contract expirations from existing customers for a net January 31 MRR of $300,000. Your Monthly Net Revenue Retention Rate for January is 111.1% ($300,000 ÷ $270,000). 4. Cash FlowWhile knowing that your Revenue is growing can be exciting, it's important to not forget the significance of maintaining a healthy cash flow. Your cash flow is the cash received minus the cash paid out during the time period. Cash flow measures the ability of the company to pay its bills and remain solvent both short-term and long-term. According to a U.S. Bank study, 82 percent of business failures are due to poor cash management.
5. Days Sales OutstandingDays Sales Outstanding (DSO) is an important financial metric to monitor. DSO measures the average age of Accounts Receivable - if your average is trending higher, then your business is more likely to struggle with cash flow. Knowing your DSO can also help determine whether or not to outsource collections or to simply improve your current processes and policies.
6. Debt RatiosThe Debt Ratios for your business are your Total Debt divided by Total Assets, and Total Debt divided by Total Equity. These ratios show how "leveraged" your company is. While it's a good idea to keep your debt ratio low, you may be able to use debt wisely to help grow your business or make prudent acquisitions to accelerate growth. In these days of increasing interest rates and questionable economic times, it is especially important to monitor these financial ratios.
These two important types of debt ratios are also referred to as solvency ratios. These ratios help you to determine the financial risk of your business and its liabilities and help you to understand the creditworthiness of your business and its long-term sustainability and health. You'll want to check your ratios at least quarterly to understand your financial risk and health.
7. Assets to Liabilities RatiosTotal Assets divided by Total Liabilities and Current Assets divided by Current Liabilities should be tracked on-going. These are important KPIs that should be focused on for the health of your business. A baseline goal is to have at least $2 of liquid Current Assets (Cash & Receivables) to pay each $1 of Current Liabilities. A bank will require at least a 2 to 1 ratio of Assets to Liabilities to approve most business loans.
When trying to gain a better understanding of your business, tracking KPIs will help you take the guesswork out of your financial situation. CEO Advisor, Inc. can help you stay informed about the health of your business, and assist you in identifying and solving any challenges that may arise.
CEO Advisor, Inc. can advise and assist you in establishing a full range of KPIs to substantially increase your sales, profits and the value of your business.
Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370 by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Many CEOs will simply check their Profit & Loss statement at the end of the month to assess their company's bottom line: Net Income. However, it is important to look beyond this base measurement to ensure you are getting the full picture of your company's health and your profitability. By understanding additional metrics and key performance indicators (KPIs) with management reporting, you will be better able to make informed decisions for your business to ensure greater success.
So how do you determine or measure the health of your business? Start by monitoring these 7 important key performance indicators:
1. Gross Profit Margin A healthy and profitable business has a high Gross Profit Margin, which can be determined by dividing Gross Profit by Sales. Gross Profit Margin, also known as Gross Margin, varies by industry but it is so essential. Software companies will have Gross Margins of 70% - 85%, digital media companies and other service companies should have 50% - 60% Gross Margins and manufacturing companies will have Gross Margins of 30% - 50%. As a small or mid-size business, improving your Gross Margin should be one of your key goals - increasing Revenue while decreasing the costs to deliver your products and services.
2. Customer Churn and Revenue ChurnCustomer Churn and Revenue Churn are two critical KPIs that need to be tracked for recurring revenue and are so important to sales, profits and the value of your business. The lower the rate of churn, the better. A SaaS company Customer Churn figure should be 1% or less per month or less than 12% per year. It is important to track and improve both Customer Churn and Revenue Churn.
Definitions:
MRR = Monthly Recurring Revenue ARR = Annual Recurring RevenueNRR = Net Revenue Retention
Customer Churn = No. of Customers at the beginning of the period - (minus) No. of Customers at the end of the period (excluding new Customers sold during the period) / (divided by) No. of Customers at the beginning of the period. (This can be calculated for any length period i.e. monthly, quarterly or annually)
Revenue Churn = Amount of Recurring Revenue at the beginning of the period - (minus) Amount of Recurring Revenue at the end of the period (excluding new Recurring Revenue sold during the period) / (divided by) Amount of Recurring Revenue at the beginning of the period. (This can be calculated for any length period i.e. monthly, quarterly or annually)
3. Net Revenue Retention RateAn extremely important metric is Net Revenue Retention Rate. If you don't retain your customers, your business will suffer tremendously. Net Revenue Retention Rate should be monitored monthly and annually. The higher the Net Revenue Retention Rate, the better you are at keeping your clients satisfied and growing your existing clients. Setting goals and tracking customer retention helps to improve your service offering while increasing sales and profits. Software-as-a-Service (SaaS) companies should strive to achieve a Net Revenue Retention Rate over 100% and set a goal of 115% or higher.
Monthly Net Revenue Retention Rate (NRR) = (Starting MRR + Expansion MRR (or upgrades/upsells) - (Contraction MRR (or downgrades) - Churn MRR (lost customer Rev.)) / Starting MRR x 100 (for %) (This can also be calculated annually using ARR instead of MRR)
Net Revenue Retention Rate examples: NRR measures growth from existing customers. Any number over 100% is good, but favorable NRR is in the 115% - 150% range.
Example: Your software company starts the year on January 1 with an MRR of $270,000 and ends January with an MRR of $350,000 (due to $80,000 in upsells) from the existing customers. And your business ends January with $20,000 in Contractions (reduced software licenses) and $30,000 in Revenue Churn due to contract expirations from existing customers for a net January 31 MRR of $300,000. Your Monthly Net Revenue Retention Rate for January is 111.1% ($300,000 ÷ $270,000). 4. Cash FlowWhile knowing that your Revenue is growing can be exciting, it's important to not forget the significance of maintaining a healthy cash flow. Your cash flow is the cash received minus the cash paid out during the time period. Cash flow measures the ability of the company to pay its bills and remain solvent both short-term and long-term. According to a U.S. Bank study, 82 percent of business failures are due to poor cash management.
5. Days Sales OutstandingDays Sales Outstanding (DSO) is an important financial metric to monitor. DSO measures the average age of Accounts Receivable - if your average is trending higher, then your business is more likely to struggle with cash flow. Knowing your DSO can also help determine whether or not to outsource collections or to simply improve your current processes and policies.
6. Debt RatiosThe Debt Ratios for your business are your Total Debt divided by Total Assets, and Total Debt divided by Total Equity. These ratios show how "leveraged" your company is. While it's a good idea to keep your debt ratio low, you may be able to use debt wisely to help grow your business or make prudent acquisitions to accelerate growth. In these days of increasing interest rates and questionable economic times, it is especially important to monitor these financial ratios.
These two important types of debt ratios are also referred to as solvency ratios. These ratios help you to determine the financial risk of your business and its liabilities and help you to understand the creditworthiness of your business and its long-term sustainability and health. You'll want to check your ratios at least quarterly to understand your financial risk and health.
7. Assets to Liabilities RatiosTotal Assets divided by Total Liabilities and Current Assets divided by Current Liabilities should be tracked on-going. These are important KPIs that should be focused on for the health of your business. A baseline goal is to have at least $2 of liquid Current Assets (Cash & Receivables) to pay each $1 of Current Liabilities. A bank will require at least a 2 to 1 ratio of Assets to Liabilities to approve most business loans.
When trying to gain a better understanding of your business, tracking KPIs will help you take the guesswork out of your financial situation. CEO Advisor, Inc. can help you stay informed about the health of your business, and assist you in identifying and solving any challenges that may arise.
CEO Advisor, Inc. can advise and assist you in establishing a full range of KPIs to substantially increase your sales, profits and the value of your business.
Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370 by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Mark Hartsell, MBA, President of CEO Advisor, Inc. to Judge the Octane High Tech Awards
- As an Octane Preferred Advisor (OPA), CEO Advisor, Inc. advises start-up, early stage and mid-size companies on growth advisory, funding advisory and mergers and acquisitions advisory services.
- Mark Hartsell, MBA, President of CEO Advisor, Inc. has been chosen by Octane to be a judge at the upcoming Octane High Tech Awards on September 21, 2023 in Irvine, CA. The event consists of over 500 attendees, institutional funding sources, and some of the top technology companies in Orange County, CA and beyond.
- Judging Day took place on August 9, 2023 in Irvine with multiple categories including:
- * Best Technology Company
- * Best Technology Company Leadership Team
- * Best Enterprise or B2B Technology Innovation
- * Best Consumer Technology Innovation
- * Best Innovation in Medical Technology/Life Sciences
- * Deal of the Year
- * Best Clean Tech/Green Company
- * Best Large Disruptor/Innovator
- * Best Emerging Technology Company
- * Best Technology CEO
- * Next Wave Award
- The Octane High Tech Awards have been an annual event each September for many years and it highlights some of the most innovative CEOs and technology companies in Orange County.
- Mark Hartsell, President of CEO Advisor, Inc. states, "I am honored to participate as a judge in such a prestigious event as Octane's High Tech Awards. Our involvement in working with technology CEOs for nearly 20 years makes this a great opportunity for us to assess and interact with the best and brightest CEOs and companies."
- If you are in need of a business advisory firm to take your business to the next level, contact Mark Hartsell, MBA, President, today for a no cost consultation by calling (949) 629-2520, by mobile phone at (714) 697-3370, by emailing MHartsell@CEOAdvisor.com or visit www.CEOAdvisor.com for more information.
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