For young businesses, it is difficult for entrepreneurs to acquire enough information to help in making decisions. In spite of businesses taking a short period to break-even, it is not reasonable for an entrepreneur to assume that he or she has succeeded.
Entrepreneurs ought to bear in mind numerous considerations when making decisions on matters affecting their young businesses. For young businesses, entrepreneurs need to use metrics like pipeline coverage, sales per employee, and customer payback duration to gauge the performance of their businesses, thus make viable decisions (Rainey Para.1).
Sales pipeline refers to coming up with a list of all the sales forecasts. Typically, entrepreneurs ought to consider their projected sales volume and approximate the likelihood of accomplishing each forecast. It is imperative to update this information periodically.
Sales pipeline is represented in the form of a fraction with the numerator representing the total volume in the pipeline and the denominator representing the sales goal. Consequently, sales pipeline measures the success of the business with respect to an established sales goal. As the business continues growing, it becomes easy for entrepreneurs to link closure rates to goals (Rainey Para.4-6).
Apart from considering the pipeline coverage in making critical entrepreneurial decisions, young entrepreneurs need to consider the sales average for every employee. This measure might appear simple, but it is of significant value not only to small businesses, but also to big businesses. The value of sales per employee is obtained by dividing the total sales by the number of employees.
In most cases, small businesses scale up rapidly ahead of their visions (Rainey Para.7). It is imperative to have accurate data on the average sales per employee to ensure that a business witnesses a continuous growth trajectory.
At times, whenever entrepreneurs notice that their organisations are doing well in the market, they rush to hire more employees without putting into consideration the kind of employees the business requires most (Rainey Para.7). Focusing on the average sales per employee helps the entrepreneurs in understanding the importance of recruiting salespeople over other employees.
Another metric that can help entrepreneurs make informed decisions on future strategies for their businesses is the customer payback period. Customer payback period is the best metric for examining the cost of recruiting a customer into a business. Nevertheless, this measure requires a lot of time to come up with concrete information.
Depending on the cost of acquiring a customer, all a business does may be either sensible or insensible. A business that acquires customers at low cost always does well in the market (Rainey Para.8). Initially, entrepreneurs do guesswork when determining the cost of hiring customers. However, with time, they can the customer payback period metric to determine the cost of acquiring customers.
Once the entrepreneurs understand the cost of acquiring customers, they embark on determining the period their businesses would take to recover this cost. Customer payback period helps entrepreneurs in determining the amount of money their businesses require to grow (Rainey Para.9-10). Besides, it helps them project the amount of profit their businesses are likely to make.
All the three measures apply to all businesses. Consequently, entrepreneurs across the globe and in all industries can use them to determine what needs to be changed in their businesses to enhance performance. In case an entrepreneur wishes to lure investors to his or her business, he or she would require having knowledge about the three metrics.
Works Cited
Rainey, Don. 3 Numbers All Entrepreneurs Should Know, 2012. Web.
3 Numbers All Entrepreneurs Should Know
In the early days of a startup, it can be tough to find good data to help with decision-making. Put a priority on these three numbers, and you’ll be fine.
To make good decisions, you need good data. That’s a given, right? But in a start-up, what data should you be looking at?
In the early days of a startup, sometimes there isn’t much to measure. A comparison of this year’s sales compared to last year’s isn’t all that helpful if you’ve only been around for eight months. But that doesn’t mean you shouldn’t start collecting data right away.
So where can you find relevant information? As an investor, I would offer three metrics that will give you some insight into your current operations and help you do some short-term forecasting. For most small companies, this will be a good step toward focusing attention on the information that will lead to informed decisions.
Pipeline coverage
The sales pipeline is a listing of all your sales prospects. Typically, you’d include the projected sales amount and estimate the probability of success for each account. You’d update the information regularly.
Sales pipeline coverage is a fraction. The total amount in your pipeline is the numerator, and the sales goal is the denominator. So sales pipeline coverage measures everything in the sales pipeline against the sales goal.
As the business matures, you’ll get better at estimating closure rates, and you’ll be able to tie closure rates to milestones. If you’ve only had one meeting with a particular customer, you might assign that deal a 20% chance of closing. Once the customer has agreed to pricing, you might bump that up to 50%.
In practice, you want your pipeline coverage to be over 2.5x. That should virtually assure you make your target, as long as you’ve got a reasonably competent sales effort and have done a good job qualifying your customers.
Sales per employee
This metric is simple enough, and it’s good for businesses of all sizes. Just take the gross sales number and divide it by the number of employees.
Since small businesses typically scale too fast ahead of their prospects – the optimism of entrepreneurs is both their blessing and their curse – sales per employee is a critical measure within growing companies. Warning: Once you start focusing on this number, you’ll quickly see the intrinsic appeal of hiring salespeople over other personnel.
Customer payback period
The very best metric for evaluating your business, customer acquisition cost, takes a while to assess. Ultimately, everything your business does will either make sense or not depending on how much it costs you to acquire a customer. If you can acquire customers cheaply or profitably, you will do well.
At first, customer acquisition cost is just a rough guess. But once you have that in hand, you can start thinking about the customer payback period. If the cost to acquire a customer is known, the logical question is how many months it will take to recover that cost.
The value of this metric lies in its ability to help you figure out how much money you need to grow and how profitable your company is likely to be. Put another way, how many customers can you afford to acquire with your existing capital or operating profits? How much growth can you support? Growth is more capital-intensive than failure. The length of your customer payback period gives you a window into your growth potential.
The beauty of these three metrics is that they apply universally. CEOs can use them to better understand what’s working and what needs to be changed in order to meet short and long-term goals. For a company seeking outside funding, knowledge and management of these metrics is critical to allowing investors to understand your business and potential.