3 Numbers All Entrepreneurs Should Know
To make good decisions, you need good data. That’s a given, right? But in a start-up, what data should you be looking at?
In the early days of a startup, sometimes there isn’t much to measure. A comparison of this year’s sales compared to last year’s isn’t all that helpful if you’ve only been around for eight months. But that doesn’t mean you shouldn’t start collecting data right away.
So where can you find relevant information? As an investor, I would offer three metrics that will give you some insight into your current operations and help you do some short-term forecasting. For most small companies, this will be a good step toward focusing attention on the information that will lead to informed decisions.
1. Pipeline coverage
The sales pipeline is a listing of all your sales prospects. Typically, you’d include the projected sales amount and estimate the probability of success for each account. You’d update the information regularly.
Sales pipeline coverage is a fraction. The total amount in your pipeline is the numerator, and the sales goal is the denominator. So sales pipeline coverage measures everything in the sales pipeline against the sales goal. As the business matures, you’ll get better at estimating closure rates, and you’ll be able to tie closure rates to milestones. If you’ve only had one meeting with a particular customer, you might assign that deal a 20% chance of closing. Once the customer has agreed to pricing, you might bump that up to 50%.
In practice, you want your pipeline coverage to be over 2.5x. That should virtually assure you make your target, as long as you’ve got a reasonably competent sales effort and have done a good job qualifying your customers.
2. Sales per employee
This metric is simple enough, and it’s good for businesses of all sizes. Just take the gross sales number and divide it by the number of employees. Since small businesses typically scale too fast ahead of their prospects – the optimism of entrepreneurs is both their blessing and their curse – sales per employee is a critical measure within growing companies. Warning: Once you start focusing on this number, you’ll quickly see the intrinsic appeal of hiring salespeople over other personnel.
3. Customer payback period
The very best metric for evaluating your business, customer acquisition cost, takes a while to assess. Ultimately, everything your business does will either make sense or not depending on how much it costs you to acquire a customer. If you can acquire customers cheaply or profitably, you will do well.
At first, customer acquisition cost is just a rough guess. But once you have that in hand, you can start thinking about the customer payback period. If the cost to acquire a customer is known, the logical question is how many months it will take to recover that cost.
The value of this metric lies in its ability to help you figure out how much money you need to grow and how profitable your company is likely to be. Put another way, how many customers can you afford to acquire with your existing capital or operating profits? How much growth can you support? Growth is more capital-intensive than failure. The length of your customer payback period gives you a window into your growth potential.
The beauty of these three metrics is that they apply universally. CEOs can use them to better understand what’s working and what needs to be changed in order to meet short and long-term goals. For a company seeking outside funding, knowledge and management of these metrics is critical to allowing investors to understand your business and potential.
DON RAINEY | Columnist | General Partner, Grotech Ventures
Don Rainey is a General Partner with Grotech Ventures, which invests in early stage technology companies. He was named to the Washingtonian Magazine Tech Titans List and earned the Northern Virginia Technology Council?s Lifetime Navigator award for his support of entrepreneurs. Don blogs at VC in DC at http://startups.typepad.com.