The Five Money Metrics You Need
Sep 30, 2024In the fast-paced world of entrepreneurship, it's easy to get lost in a sea of numbers and complex dashboards. On the latest episode of Keep What You Earn, Shannon breaks down the five essential money metrics that every CEO and business owner should be equipped with.
Gross Margin: Gross Margin is a fundamental indicator of your company’s core profitability. Shannon underscores its importance by explaining that gross margin is calculated as gross profit divided by revenue. Your gross profit is what remains after subtracting the cost of goods sold (COGS) from your total revenue. This includes everything directly related to producing and delivering your product or service, such as manufacturing, shipping, processing, and direct labor. “Your gross margin tells you if your offer is profitable at its core,” explains Shannon. Understanding this percentage helps you assess whether your primary offerings are viable and sustainable.
Net Margin: While gross margin focuses on the profitability of your products or services, net margin provides a broader picture of your business’s overall financial health. Net margin is derived from net profit (total revenue minus all operating expenses) divided by revenue. Shannon introduces the concept of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as an advanced way to look at net margin. “Net margin asks, ‘Do we have a profitable business?’ while gross margin asks, ‘Do we have a profitable offer?’” This metric is crucial for understanding the sustainability of your business model and whether your operating expenses are in check.
Net Cash Flow: Net Cash Flow is about tracking the actual movement of cash in and out of your business. It’s a simple yet powerful metric that answers whether your bank account balance is growing over time. “If more money comes in than goes out, your bank account grows. That’s positive net cash flow,” says Shannon. Tracking net cash flow ensures you have the liquidity needed to cover expenses, invest in growth opportunities, and stay resilient in times of financial stress.
Revenue Retention: Revenue retention delves deeper than just knowing your top-line revenue; it examines how much of that revenue is retained from your existing customers year over year. Shannon differentiates between recurring revenue and reoccurring revenue. Recurring revenue is money you can expect at regular intervals (like subscriptions or retainers), while reoccurring revenue comes from customers who make repeat purchases but without a fixed schedule. “Retention tells you how many of your customers are sticking around,” Shannon notes. High revenue retention indicates strong customer satisfaction and loyalty, which usually translates into lower marketing costs and higher long-term profitability.
LTV to CAC Ratio: One of Shannon’s favorite metrics is the LTV to CAC ratio, which stands for Client Lifetime Value (LTV) divided by Client Acquisition Cost (CAC). This ratio reveals how valuable a customer is relative to the cost of acquiring them. “To calculate LTV, consider the total gross profit you expect from a client over their entire relationship with your business,” Shannon explains. CAC is the total cost of sales and marketing efforts divided by the number of new clients acquired. A healthy LTV to CAC ratio indicates that your clients’ value far exceeds the acquisition costs, making your sales and marketing efforts worthwhile.
These five money metrics—gross margin, net margin, net cash flow, revenue retention, and LTV to CAC—serve as a robust foundation for making informed business decisions. Shannon recommends incorporating these into your monthly reporting routine and working closely with your bookkeeper to develop a scorecard for quick reference. By focusing on these key indicators, you’ll be better equipped to identify areas of strength and opportunities for improvement, ultimately driving your business towards greater profitability and success. Listen to the full episode of Keep What You Earn for an in-depth discussion and actionable tips on managing your business finances effectively.
What you'll hear in this episode:
03:48 Compare your gross margin to industry standards.
08:08 Measure net cash flow to increase reserves.
11:22 Measure revenue retention and LTV to CAC ratio.
14:05 Calculate client acquisition cost dividing total spend clients.
16:27 LTV to CAC ratio should be positive.
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