Don Rainey just posted an article on Inc.com called “3 Numbers All Entrepreneurs Should Know” discussing 3 key metrics that an early-stage entrepreneur needs to understand to be able to move his/her business forward. He correctly argues that at the early stages of a new venture, it can be difficult to use many of the traditional measures of company performance because they rely on tracking a company’s position over a period of time and brand new companies simply do not have the data to be able to perform such analysis. Additionally, intense financial analysis can be overwhelming to new entrepreneurs, but at this stage they are typically not in the position to pay to outsource those services.
Rainey’s key metrics all focus on the sales cycle as a company clearly cannot succeed without bringing in paying customers. They are: pipeline coverage, sales per employee, and customer payback period. These 3 metrics will definitely help you get focused on whether or not your company is on the road to profitability or trouble. The article is clear, concise, and is a great, quick read for entrepreneurs feeling a little overwhelmed or confused by financial analysis.
The only tip I would add is that, for small companies, the old saying “cash is king” is nearly always true. So yes, you need to track all of the metrics that Rainey describes for you, and you also need to track your actual cash. Knowing how much money you should be bringing in month to month is a very different thing than knowing how much money you will be bringing in. Make sure that you stay on top of the relationship between your accounts receivable and accounts payable so that you don’t get in trouble. If your customers are paying you 90 days after you bill them but you need the money to make payroll 30 days after you bill them, you’re going to get in trouble fast. So be sure to keep a handle on your cash at hand in addition to the performance measures that Rainey suggests.