#10 - Step 3 of The Financial Operating System: Define Metrics and Goals

This episode is packed with actionable insights on operationalizing financial performance goals and bridging the operations-finance chasm by crafting SMART goals and balancing leading and lagging indicators. 

We explore the power of Entrepreneurial Operating System (EOS), Objectives and Key Results (OKR), and Scaling Up frameworks. We dive into the importance of creating shared definitions and aligning teams within your company. We also unravel the mystery of the acceptable achievement rate for goals and the art of celebrating wins. 

We'll chat about the types of metrics that can be incorporated into scorecards and the science of assigning people metrics they can control. 

This episode is critical to being able to manage your business toward achieving your financial objectives.

Thanks for listening!

Host Cal Wilder can be reached at:
cal@empoweringhealthybusiness.com
https://www.linkedin.com/in/calvinwilder/

Transcript

Moderator  00:01
Welcome to the Empowering Healthy Business podcast, THE podcast for small business owners. Your host, Cal Wilder, has built and sold businesses of his own and he has helped hundreds of other small businesses. Whether it is improving sales, profitability and cash flow; building a sustainable, scalable and saleable business; reducing your stress level, achieving work life balance, or improving physical and emotional fitness, Cal and his guests are here to help you run a healthier business, and in turn, have a healthier life.

Cal Wilder  00:35
Welcome. Today is our third episode in a series introducing The Financial Operating System. And it's the 10th overall episode of the podcast. So it's a minor milestone, a nice round number. I certainly have a lot more great topics to cover in future episodes. But it's fitting that today's episode is number 10, because the topic for today is one of my favorite topics and finance.

Cal Wilder  01:02
Our approach is first to focus on the metrics, and then second to set goals for each metric. The difference is, for example, if I've got a business with a cashflow problem, and I think collecting from customers is the primary cause of my cashflow trouble, then, I need a metric around collections. And so on a weekly basis, my metric might be what's the percent of delinquent customers that we called this week, or on a monthly basis, it might be? What is the days sales outstanding at the end of the month. So you know, those are the metrics. Now, the goals might be, I want 100% of my delinquent customers called each week, or I might want to day sales outstanding, or a DSO of 35 days at the end of the month. But the key is, you know, get the metric, right. And then we can incrementally improve performance over time and upgrade our performance standards over time. 

Cal Wilder  02:45
Listeners, you may be familiar with the concept of SMART goals. Those are being Specific, so it's very tangibly defined. It's Measurable, so we know how to measure and whether we're achieving it or not. It's Attainable, so it's realistic, it's something we could actually do. It's Relevant because it's closely aligned with our financial objectives as a company. And it's Timely, meaning we have a defined period of time in which we need to achieve a certain level of performance. So I want us to keep the SMART concept in mind as we set goals. 

Cal Wilder  03:24
Let's talk through a real world example of setting a smart metric and smart goal. So you might have a goal or an objective of growing your business. So that's definitely not smart, as that is defined, but here are some of the ways we could make it smarter. Right. So what constitutes a successful growth rate? Is 5% annual growth a win? Or is that a loss if we could actually be grow the business? 20%? Alright, so you know, trying to grow the business? Well, what constitutes successful a successful growth? Right?

Cal Wilder  04:03
A couple of episodes ago, we introduced step one of The Financial Operating System, which is defining the why that you're in business. Then in step two, we define the what you currently have when you were when we assessed your current finances. And now today, in step three, we're going to introduce financial performance metrics, which really are the WHERE that you are going. And a good set of metrics also gets into the HOW you're going to achieve your financial objectives. They help operationalize financial performance. They bridge the gap between operations and finance. They start to explain the how you go about achieving your desired financial results. 

Cal Wilder  04:17
Let's say we're trying to grow the business 20% per year. Well, what exactly are we trying to grow? 20%? Are we trying to grow revenue by 20%? Customer count by 20%? Monthly recurring revenue by 20%. We measure run rate at the end of December? Are we going to do a year over year reported numbers under GAAP accounting? We've got to get very clear on what is the specific goal that we're trying to achieve? Because that will define operational requirements to go implement? Whatever SOP and effort we need in order to try to achieve that goal.

Cal Wilder  04:47
Let's say the business has been growing 10% A year and now we set a 20% growth rate. How is doubling achievable right, the A and smart is it really too bold to grow twice as fast next year as previous years. What's going to change to allow you to do that? Are we adding a VP of sales? Are we investing more in marketing? Are we targeting a specific vertical we've had a lot of success in. What's gonna be different next year than last year to make a much higher goal attainable, right?

Cal Wilder  05:24
If our goal is, if the financial objective of the business owner is to maximize profitability to save money for retirement and fund their kids college education, well, goals based around growth aren't necessarily as relevant to financial objectives. So want to make sure that if we're trying to grow 20% is that early aligned with putting more profit in the pockets of the owner. Maybe we shouldn't just try to go five or 10%, but focus our goals on more relevant metrics around profitability.

Cal Wilder  06:04
And then finally to grow the business 20%, we're going to need to execute over all four quarters of the year, all 12 months of the year. We're going to need to set some cascading goals for q1 and q2, q3, q4 and all roll up into our 20% annual growth.

Cal Wilder  06:27
But we've got to get the year off to a good start, we can't assume that we're going to pick it up in July and August. In order to hit our annual growth goal. We've got to pick it up consistently over the whole course of the year with some timely metrics for each quarter and month of the year.

Cal Wilder  06:47
Sometimes metrics are set to focus attention on solving a problem like collections on the previous example. And then sometimes metrics are set more on long term strategic goals of the business around growth and profitability and targeting a certain industry vertical or, or something like that, right trying to execute on a three year five or 10 year vision. So both are perfectly valid reasons to set an important company metric and get it on the scorecard. If the problem is big enough, then it's fine to create a metric to solve that problem. But let's try to remember that once we've solved that problem, and collections is the problem, once we're doing regular collection calls to customers, and we've got our DSO down to a reasonable number, you know, we can replace that metric with something that's going to be a little bit more impactful.

Cal Wilder  07:43
Some questions I get around goals, and eventually we're going to dig into specific metrics and goals, but some of the questions I get around metrics and goals include, you know, over what period of time, should I set these goals. And so my perspective on that, after working with a lot of businesses over the years, including my own businesses, is that goals that are set based on more than three years into the future, really more in the vision, territory, and a big picture, here's where we're trying to go, then in specific goals that we're going to measure and manage toward when we show up to work every day. 

Cal Wilder  08:23
Now, some folks may operate perfectly well with five or 10 year plans, a lot of detail and more power to them. That's how I used to think I used to be one of those people that loved to have 5-10 year goals and you know, showed up to work and had all these cascading metrics for what I needed to do this week that was going to translate into achieving a 10 year goal. But that's hard for most people to get their head around. And eventually, it became hard for me as well. Because once you get beyond three years, we're kind of guessing and hoping we're going in the right direction. Once we get less than three years, then we can have some very specific metrics that we can really wrap our arms around, we can really cascade down to, you know, this year, this quarter this month, and what do I need to do this week? Right. But beyond that, it's it's a little bit hard.

Cal Wilder  09:22
And so there's some frameworks that can help organize our goals and help provide a common language.

Cal Wilder  09:31
Some of those frameworks include the Entrepreneurial Operating System, or EOS. There's a great book that came out probably in the 2010 kind of timeframe called Traction which introduced the concept. There have been some other books published by the author Gino Wickman following up on that. EOS is a very structured framework geared around defining weekly scorecards and quarterly rocks and annual goals and tackling issues in a systematic way. It's a great framework. I've used it. Clients have used it. The only knock on EOS is it sometimes gives a little short shrift to strategy and making the decisions that differentiate your business from the competition that's going to allow you to win with your target customers. So EOS is great for execution. Just gotta remember if we're working on EOS, make sure that we have a differentiated strategy that's gonna allow us to win in our chosen marketplace.

Cal Wilder  10:40
OKRs stands for Objectives and Key Results. It's another common framework in place. I think it got a lot of attention when a book was published called measure what matters by a venture capitalist, John Doerr, who invested in all the big name, multi decabillionaire, companies like Google, etc. And so that's geared around defining objectives that we're trying to accomplish. And then 2, 3, 4 measures of how well we've advanced toward that objective. And so you might have an objective to increase revenue 20%, if we keep working on that one, and then the key results that we're trying to achieve might be bringing in 15 new clients in a certain industry vertical, generating a certain number of inbound leads from online marketing, things like that. So we could come up with three, four, maybe even five key results that would support growing the business by 20%. And really manage toward those key results that drive us toward the objective.

Cal Wilder  11:56
And the other framework I'll mentioned, was called Scaling Up, used to be called Gazelles. And that one is very strategic in nature, about finding that one thing that's going to allow you to grow the business by 10x. And so for businesses that think strategy is going to be the key to their ability to scale dramatically, Gazelles else can be a great framework. Sometimes it gives a little short shrift to operational execution, kind of the inverse of EOS. 

Cal Wilder  12:30
But whatever framework we use, or make up your own, two things are critical though. Number one, there's got to be a shared vocabulary and shared definitions that everybody understands, we want the energy of everybody in the company going into achieving goals, not negotiating what they mean or how they are measured, right. So we want to make sure it's very clear the vocabulary and the definitions of the goals. 

Cal Wilder  13:00
And then the second thing that's critical is we want to have alignment between departments in teams within the company. We cannot have goals that conflict with each other. Or be like a rowboat with rowers rowing in opposite directions, right? We don't want to have a sales team, purely measured based on new logos, sales to new customers while we have a fulfillment team focused on gross profit margin. Where sales might be willing to discount the heck out of deals to in order to hit their growth target for new logos. Meanwhile, the fulfillment organization is inheriting all these discounts that completely conflict with their gross profit margin target. And then we might have a customer service department that's measured on customer or client retention, and very focused on how do we retain these clients. And so if they don't have the ability to offer any discounts, or service credits, they may feel like they're handicapped in the ability to hit their own metrics. 

Cal Wilder  14:10
So it's important that we give a lot of thought to once the organism gets to a certain size, making sure that the metrics align between the departments and teams and the overall company metrics. You know, to use an analogy back to that rowboat, we have like one rower on that boat, who is out of sync with the rest of the rowers that kills the entire boat if you just picture it. One guy is you know, rolling backwards when everybody else is rolling forwards not going into or is it completely kills the effectiveness of the team. So, you know, sometimes it's just one metric for one department that's out of line that you know, can derail the momentum of the entire business.

Cal Wilder  14:55
Another question I get is around achievement rate expectations. Seems you know, what should I expect as the business owner for achievement of goals? Is 100% the standard expect to achieve every goal? Or is 75%? Good enough? Because we've set a goal sufficiently high that can 75% of the way there 80% of the way there is great, and there's really no right answer. But the key is, we got to be clear and consistent about what that standard is. I personally like somewhere around 80%, because I feel like if we set an expectation that we're going to achieve 100% of our goals, then we may not set ambitious enough goals that we can really realize our potential as a company. If we can, we're gonna set some ambitious goals and when we get most of the way there but not 100% of the way there, we want to be able to celebrate that as a win and not view it as a loss if we come up a hair short of an ambitious goal. 

Cal Wilder  16:00
However, I think if the expectation is less than achieving 75 to 80% of goals, then we may just not take it seriously enough. That's the risk of setting a target that's too low, we want everybody working like heck to achieve those goals.

Cal Wilder  16:23
If we can hit 80% of them, then that's a big win. So if we have four or five goals, then achieving, you know, all but one of them is okay. If we have an objectives and key results framework, the OKR framework, you know, we may have an objective and then four or five, 3 , 4, 5 key results. So if we hit all with one of those key results, then that's a win in the OKR framework. So we can set these metrics. And then we're gonna get to specific metrics, but going through the structure in the framework before we dig into specific metrics. Once we define some metrics, we start populating them into a scorecard. And scorecards a whole that's a topic for a whole other episode in itself. And, and we'll cover that, but how we organize and structure scorecards is key.

Cal Wilder  17:19
We'll just cover a few brief concepts now and then tune into a future episode where we'll drill into a lot of detail on scorecards, but briefly, we've got to have a weekly scorecard that rolls up into quarterly and annual goals. We need weekly accountability. If it's not clear what people are supposed to be prioritizing and accomplishing every week, they create their own priorities, and they lose track of what we've defined as most important for the business. So we got to keep people on track with weekly scorecard accountabilities. And the weekly metrics are, tend to be activity based, effort based standards based where there's an expectation of we have defined a standard for what good performance looks like at this company. And the expectation is we exceeded 100% of those standards just by showing up caring, working hard and applying our skill, we can achieve 100% of our standards. Now there's a difference between goals and standards. And this is very important. There's a great consulting organization called the program that first laid out really clearly for me the difference between goals and standards. So goals are objectives that we're trying to accomplish to create long term big wins for the company.

Cal Wilder  19:16
So a leading indicator might be those collection calls, it might be marketing activities, and might be number of sales proposals presented. These are all things that do not equal to revenue dollars or profit dollars. But they are the activities that when done consistently at enough volume will produce the revenue and produce the profit and produce the cash flow. Over time. You know, if we do the required weekly activities and meet our standards on a weekly basis, then we are likely going to achieve our quarterly goals, the quarterly goals are gonna be more lagging indicators, quarterly goals might be revenue dollars, they might be adding a certain number of new clients, right? 

Cal Wilder  20:40
We can't show up for work this week and book $1 million of revenue and 10 new clients. What we can show up is, we can reach out to our 10 existing clients to do some quality assurance work and nurture the relationship, we can make 10 calls to prospective clients and our target vertical, we can contact every client who's delinquent in payment. There are things we can do this week, that will roll up and put us in a position to hit our quarterly and annual goals. But our weekly metrics tend to be activity and standards based the roll up to quarterly goals and annual goals that aren't as purely under our control, and that are more results based lagging indicators. So important to keep that in mind as we set metrics and design scorecards. 

Cal Wilder  21:32
All right, so let's talk about some specific metrics. So I divide metrics into a few different categories. And these are determine, you know, the mix between these categories, is dependent upon like the why you're in business and the business model. So things from step number one to the financial operating system, when when we define you know, what we're trying to accomplish financially from owning this business, you know, what's our basic business model? And given those two facts, then let's figure out the set of most meaningful metrics. 

Cal Wilder  22:10
There's a temptation to include everything, right? Every metric seems like it's important. But some are more important than others. A common question I get is, How many metrics should we have on our scorecard? So, you know, my answer is typically no more than 10. Five would be better than 10. Individuals can only focus on so many metrics. So if I have to show up to work today, and worry about achieving 10 different metrics, it's not that's gonna spread me pretty thin, I try to keep all 10 top of mine. But if I show up to work, and I only have five that I have to worry about, or, you know, two or three, even, then I'm going to be more laser focused on making sure he have those smaller number of objectives. 

Cal Wilder  23:01
Now, caveat this with the fact that, you know, in small businesses that do not have different departments, the company scorecard could end up being bigger because it effectively combines department level metrics into one report. Now, larger businesses, they have a top level scorecard that may be distilled down into a shorter list, if there are separate department level scorecards, you know, so we had a finance department scorecard, you know, collection calls from beyond their cash in the bank, or some kind of cash metric would be in there a number of other things, those are not all going to make it into the top level company's scorecard. But when the CEO sits down with the CFO and goes through the finance department metrics, they're going to be covered. And then the top one or two may make their way onto the top level company scorecard. And the same thing with, you know, the marketing department or sales department, customer service department. They're all going to have their own scorecard. So if each department has five things that are really critical, but you're a small business, and you don't actually have five different departments, and people are in multiple seats, they may end up with a company scorecard that has 15 metrics on it. And that's okay. Eventually, when when your business grows, and you have multiple departments, then we can break it out into department level scorecards.

Cal Wilder  24:18
So as we go about creating the list of metrics that really matter most, a few things to keep in mind: If we've got a great set of metrics, no one's going to provide an accurate picture for how the business is performing and what's driving that performance. It's gonna balance those short term. leading indicators are more activity based against the longer term lagging indicators that are more results based,

Cal Wilder  24:47
And it's gonna provide feedback on a regular basis about how we're performing against our job missions right? 

Cal Wilder  25:04
Now, there's some shortfalls or pitfalls that we want to avoid with metrics as well. 

Cal Wilder  25:09
And so we want to avoid the wrong metrics. That sounds obvious. But you know, I gotta mention it because have we gone through the trouble of defining our why (what are our financial objectives in owning this business) we want to make sure we have metrics that support that objective. So if we're really trying to maximize profitability, so the owner can fund his retirement account and pay for his kids college education, then we've got to have metrics around profitability. All our metrics around producing leads, and selling new deals without any regard to profitability of those deals, may be at odds with the objectives of the owner and have the wrong set of metrics.

Cal Wilder  25:53
We might end up with too many metrics. And as I mentioned a couple of minutes ago, you know, people can really only focus on five to 10 metrics viewer is better real estate on scorecards is really valuable, it's precious. If we have too many metrics, people can drown in those metrics, or they'll just cherry pick and you know, focus on the metrics that they are most comfortable with, or most easy for them to hit and ignore the ones that are harder, or that might even be more valuable for the business. We talked about alignment and cascading of metrics want to make sure that the metrics do not conflict with each other. And we want to make sure they're not even complete, right. And so we might think that improving customer retention is a really good metric. And improving profitability is a really good metric.

Cal Wilder  26:48
However, if we have a group or segment of customers that are with us, because we're giving them discounted pricing, that's not really profitable. Now we have a conflict, we've got a metric around, improving or maximizing customer retention. And we have an offsetting metric around improving profitability. And so we can't retain unprofitable customers in excu, both of those metrics, until we need to carefully consider what the priorities of the business are. And again, coming back to the why we're in business, what is most important to ownership and ensure we don't have conflicts within our metrics.

Cal Wilder  27:32
And then the other thing to keep in mind is making sure that people who are assigned responsibility for metrics have the ability to manage and drive those metrics. So C level executives have power to drive profitability through policy and spending and pricing decisions that they make. Front line customer service, people don't typically have that level of power, over making policy decisions. But they can provide a great client experience, they can quality control the work, they can reduce the defect rate, they can reduce the return rate, there and other things they can do that support the overall mission of the company to be a nicely profitable business. But the metrics for people who work in a warehouse or in customer service need to be geared toward things they can actually control and do themselves.

Cal Wilder  28:30
All right, so let's talk about actually we're getting to the point of the podcast, we're going to talk about actual metrics here.

Cal Wilder  28:39
In the few categories, as I mentioned, we have some sales metrics. So these relate to things, they're going to add new customers, add more revenue grow the business, so growth oriented businesses are going to have more sales type metrics within their overall scorecard. And so we have metrics that can reflect the different stages of the sales process from, you know, marketing activities to generate leads to, you know, new meetings with prospective clients, by salespeople to presenting sales proposals to closing business and close rate. You know, all those things reflect the different stages of the sales process and the pipeline. Those are really important for businesses that are growth oriented or that are project based that need to replace their revenue every month, every quarter every year as old projects finish up. The book goes into a lot of detail. There's tables and tables of metrics in the book. So I'm not gonna highlight each of them. That's what the book is for. But there's definitely a very important category of metrics around sales. 

Cal Wilder  29:50
And then once we have customers, we move into what I call the customer value metrics where we are assessing how happy customers are, how long they remain a customer. What's the lifespan of the clien when they're a customer? What's their net promoter score? How happy are they? What's the price they're willing to pay compared to the cost of fulfilling their orders. So that can be our labor value multiple, customer-level labor value multiple reflects the, you know, the value that we're delivering to the clients, critical critical metric to have a long term viable business,

Cal Wilder  30:29
Then we get into our profit metrics. So we go down the income statement, we can look at gross profit margin, contribution margin, customer acquisition cost, the ratio of our average customer acquisition costs to the average lifetime value of the customer as measured by contribution margin of the customer. Right, we get back to get keep going down to general administrative expense, late labor value, multimodal G&A staff how much contribution margin and gross profit is our overhead supporting, I mean, that's the purpose of overhead is to support gross margin and contribution margin. So we want to hold them accountable for running a lean and mean operation to support a lot as much as much gross margin and contribution margin as possible.

Cal Wilder  31:22
Then we get into our cash flow metrics. So ultimately, we want to be converting sales into dollars of cash in the bank. And there, you know, a number of ways we can tackle this. If we have collections problems, we definitely need a cash flow metric on our scorecard. So it could be you know, on the short term activity based scorecard it could be collecting advanced deposits from customers, it could be making weekly collection calls those kinds of things. Longer term, we can be looking at days sales outstanding, we could be looking at, if it's a company, business model that has inventory, we could be looking at inventory turnover to see how quickly we can sell inventory compared to the value cash, we have invested in inventory. We've got our nice accrual basis, nice, clean, great accounting, accrual basis income statement, we want to know how much of that reported profit on the income statement, we actually converted into operating cash flow going into the bank.

Cal Wilder  32:22
And to reduce the stress and aggravation of worrying about how much cash we have in the bank-- can we make payroll, who can we afford to pay this week-- we know we might need to set a metric around how many months' worth of operating expenses do we have in cash in the bank. So what's our what's our multiple there. We want to get that multiple north of one, because when it gets too far south of one, we spend a lot of unproductive time trying to manage who we're going to pay, who we can afford to pay, taking collection calls ourselves from vendors, we spent a lot of time on low value activities, instead of growing the business making our business better. We spent a lot of time worrying about cash flow. So we want to make sure you know we've got a proper business model with enough cash reserve in the bank, we don't worry about, you know, cash flow from week to week.

Cal Wilder  33:24
And then the final category of metrics would be capital investment metrics. So these will be relevant for businesses that have a lot of a lot of cash invested in property, plant equipment, real estate. So we want to know, what's the return we're getting on those assets? What's the return on equity, you know, the return on the net net worth of the business? And what access to liquidity do we have in order to fund additional equipment purchases? And so these are really important and a certain point for businesses with a lot of cash investment requirements. The return on invested capital is often more important than specific mark. Profit Margin percentages on the income statement is more about we've invested a lot of cash in this business, what are we getting for return on that cash. There are some businesses out there that can generate tremendous returns on invested capital. Even though if you look at the income statement, the margin is very low, like a company like a Costco, WalMart, for example, when I last looked at them, and relatively low profit margin percentages, definitely single digit, if not low, single digit, but they were turning over their inventory so quickly, they were able to generate tremendous returns on equity.

Cal Wilder  34:45
So those are kind of the categories of metrics. I want to highlight four specific metrics and again, refer you to the book for the more comprehensive list of common financial performance metrics. But I'm gonna highlight four, right now that tend to be very important. 

Cal Wilder  35:05
So one of them is contribution margin. Contribution margin is really gross profit minus the service cost of delivering those services or producing those products. And so it's a measure of value on one hand, and cost efficiency on the other hand. If we've got a low contribution margin, it might be because we're pressing our products too low, because either we're not appreciating how valuable they are in the marketplace, or we're competing in a commoditized marketplace where the customers will only pay so much, and we just can't price high enough. And so we're stuck with low margins, because, you know, our product or service just isn't that valuable. And it's a reflection of cost efficiency, we could be charging a very high price for that product or service. And the market could perceive it to be worth a high price. But we might have a low contribution margin, if we're very inefficient in how we deliver the product. So it's, it's really a balancing, you know, the value in the marketplace that customers are willing to pay in terms of the price and your cost structure to deliver that service.

Cal Wilder  36:16
The second metric is lifetime customer value. And we measure that in terms of contribution margin. I know sales guys will love to talk about lifetime revenue of a customer. But revenue doesn't pay the bills. Contribution Margin ultimately pays the bills and produces profit to owners. Revenue is important, don't get me wrong. But, without contribution margin, we don't have money to pay that salesperson to bring in the customer, or pay the overhead and rent and insurance, or have any profit leftover for owners. 

Cal Wilder  36:54
So we really want to focus on contribution margin, which is the measure of the lifetime value of a customer, how many dollars of contribution margin are we going to get from our average customer over their lifetime as a customer. So it's a formula. It's average customer lifespan in number of years, times the revenue per year for that customer times the contribution margin percentage. That'll tell us what our lifetime contribution margin where the customer is. 

Cal Wilder  37:28
And that's really important. We want to know what that is. And then we can measure the return on investment from our marketing and sales activities, where we can compare our lifetime customer value against our cost of customer acquisition, right. So we know we're going to get on average $100,000 of lifetime contribution margin from our customer, that will inform how much we can afford to spend to market and sell and sign up that customer, right. So if we can spend $10,000 to acquire $100,000 of lifetime contribution margin. That's a pretty nice return on investment. Or, you know, we're beating our head against the wall or spending $100,000 on expensive marketing people and efforts and online marketing and a sales team. And, you know, on average cost is $100,000, to bring in one customer who's only producing $100,000 of lifetime contribution margin, then we are losing money, we've got a business model problem that we need to solve. 

Cal Wilder  38:37
And that brings us to our fourth metric, which is customer retention. When we talk about lifetime customer value, we need to know the number of years that we have the customer. And so we express this in percentage terms. You know, if we are willing to accept losing 1% of our customers per month to use your own numbers, that means we're gonna lose 12% of our customers per year or we're gonna retain 88% of our customers, our annual customer retention rate can be 88%. That's pretty good.

Cal Wilder  39:13
But we need to be careful about the compounding effect of small numbers. Right, because we have a we have a monthly scorecard. The difference between 2.5% and 1% and 1.5% seems pretty small. I mean, it's only half a percent or 1% difference. But if we have, you know, 0.5% monthly churn, that's going to get a 6% annual churn usimg round numbers. And that's going to be 94% annual retention. You in so that's going to get us a significantly longer lifespan than if we had you know one or one and a half percent monthly churn. Which would mean we'd, we'd only retain 88% or 82% of our clients each year. And so the difference in average client lifespan is quite large there, and can have a major impact on the profitability of the business there math exercises we go through to illustrate all that. But remember to focus on what's the long term number of years you expect to have the client, and work backwards to a reasonable monthly customer retention metric, and make sure that it rolls up and cascades in alignment.

Cal Wilder  40:36
I hope you've enjoyed this introduction to financial performance metrics. The key is, really, if you don't have a set of metrics that you're using and managing around, something is usually better than nothing. Create the best set of metrics that you can, as your first set of metrics, and then follow it, you iterate, you improve it over time, you replace a metric here and there with something else that may become more impactful for your business.

Cal Wilder  41:06
Now, if you want some help creating metrics for your business and tracking them, feel free to reach out to me.

Cal Wilder  41:13
 You may also find, may likely find if this is your first time implementing and managing metrics, that you may need to upgrade some of your accounting operations in order to accurately report on some of those metrics. And so the next episode of the podcast we'll discuss some of the common areas in the bookkeeping and accounting function that small business owners need to upgrade. Between now and the next episode, I'd encourage you to put together a set of, your best set of, financial performance metrics. Five to ten great metrics that really align your business operations with your financial objectives as business owners. Start using them. Start iterating. Start improving them over time. There's no time like the present to get started managing toward the numbers if you haven't done that yet.

Cal Wilder  42:04
Reference show notes and find other episodes on EmpoweringHealthyBusiness.com. If you would like to have a one-on-one discussion with me, or possibly engage SmartBooks to help with your business, you can reach me at Cal@EmpoweringHealthyBusiness.com or message me on LinkedIn where I am easy to find. Until next time, this is Empowering Healthy Business, the podcast for small business owners, signing off.