Whether you're an agency owner, a department leader or an individual content creator, enhancing your business financial literacy improves performance, identifies opportunities and risks, and supports better decision-making.
Let's assume you understand how to read and use a balance sheet and P&L (if you don't, now's the time!) and take a look at some financial metrics. Happily, most accounting software makes tracking and analyzing easier.
Here are four financial metrics we track:
- Average client value (total customer sales/number of customers) and average project value (total project billables/number of projects) help me track and plan growth.
- A sales by customer summary shows who my best customers are. This is really important to ensure we're not too reliant on one customer, which can spell danger if they experience a business interruption or stop working with you.
- That's why it's also helpful to determine percent of revenue by industry sector. In 2007, 95% of my business was in real estate reporting and airline magazine writing. Everything was fine till the Great Recession hit and those two industries were walloped. I lost most of my work within one quarter. After that, I focused on building diversity among my customer base and making big bets on sectors less likely to be creamed by another economic downturn.
- I also review sales by customer to factor total and average sales from returning clients and to determine what percentage of total sales comes from those sources. I think of this as a financial loyalty score because a high percentage shows we're providing value. Right now, 69% of our business is from repeat customers. I don't want all my sales to come from these folks because I need capacity to take projects that come over the transom or our client cultivation efforts.
Financial literacy isn't a nice to have. Building an understanding of the financial factors that impact your business performance and decision-making is crucial to success.