Most entrepreneurs are usually fascinated by the potential of the business venture and forget that it is also their responsible to make a business suitable and face the kicks of time.
To ensure sustainability of a business, entrepreneurs should pay much attention on the mathematics of their business venture.
The idea here is not to be the master of business figures but to have an appreciation of business percentages among others.
In my opinion, there are four critical areas which an entrepreneur should have so as to have a clear understanding in as far as business numbers are concerned. These critical arrears include the operational costs, growth rate, customer conversion rate and cash cover which are described below.
Operating costs
Operating costs are those costs which an organisation incurs on day-to-day basis as it fulfils its operational mandate, meaning costs of sales and other administrative costs are included here.
If I may ask, how much are your operating costs? I hope you are not guessing because operating costs determines profitability of your organisation as they are subtracted from revenue to get profit.
As an entrepreneur, you must keep track of this ratio to your sales since the lower it is, the higher the profitability which signals favourable performance.
Experts advise that this ratio should not exceed 80% otherwise the organisation will be in the red zone.
Growth Rate
As an entrepreneur, do not be carried away by the number of phone calls you make a week or customers who visit your organisations but have a clear idea of how well your organisation is progressing.
A business is not run on assumptions therefore understanding how your business is growing makes business sense.
Usually, organisational value (assets), sales/ revenue as well as profit are the common business metrics whose growth rate is measured to have a feel of the organisation progress.
Customer Conversion Rate
Customer conversion rate is a percentage of potential customers who take an action towards a closed or confirmed sale to an organisation.
Most entrepreneurs get carried away by the number of messages or calls they receive from customers enquiring about their products or services and forget to analyse how many of them are actually going a step further of making an order and finally become a client.
Favourable conversion rate has been recommended to be between 2% and 10%.
There is no harm to have a conversion rate above 10% but if it is less than 2%, then there is cause for concern as the owner of a business.
Cash cover
As a business, always remember to set aside a certain amount which must accumulate in your bank accounts.
These amounts should not be used in day to day operations but rather set aside and accumulate to cover a specific time frame in the event that something happens.
Cash cover is advised to be calculated on three months basis to ensure that even if a pandemic arises (we all know the Covid-19), the business will at least thrive for those three months whilst making plans of restoring the situation.
….in my dreams.
1 comment
Thumps up man