Now that we have proper financial information and metrics built, it’s important to effectively monitor and analyze the data to gain valuable insights into your business’s performance and take the necessary steps towards improvement.
Here are a variety of best practices to enhance your financial monitoring and analysis efforts:
Set Clear Financial Goals and Budgets
Once you have a good idea of past performance, take the time to build out a forecast of financial targets and a budget to measure against. Ensure that your goals encompass various metrics such as sales growth, gross profit, customer acquisition costs, and customer lifetime value.
Prepare detailed plans on how to improve growth, CAC, and Gross Profit
Growth: Collaborate with your sales leadership to develop a sales growth plan that includes stretch goals for growth. Ensure that these goals are realistic and achievable, taking into account the investments made in the sales team and marketing efforts.
Customer Acquisition Costs and LTV/CAC: While developing the sales plan and budget, it’s best to look at the most efficient way to acquire the best customers. Understanding the interplay between acquisition costs and lifetime value is key. Sometimes the cheapest customer to acquire also has the lowest lifetime value and churns fast or returns more products.
For example, you may be drawn to invest in a channel that shows a low CAC of $100. However, the lifetime value of that customer is $50 because they are seeking a bargain deal and tend to buy one time. As a result, your LTV/CAC is 0.5. An LTV/CAC ratio of less than 1 means you are not paying back the cost to acquire a customer. On the other hand, consider a different channel where you need to nurture the customer. Here, the CAC is $300, but the LTV of those customers averages $2,000. This is because they purchase products across the product line and exhibit loyalty for years, resulting in an LTV/CAC of 6.7.
Once you have a grasp on the LTV/CAC dynamic between your products and channel segments, you will have the data to make the decision of where best to invest to grow the company.
Gross Profit and LTV: Improving both gross profit and lifetime value of a customer can be driven by 1) Increasing price 2) reducing COGs through more efficient delivery and/or 3) increasing the revenue received from a customer by expanding their purchasing and/or extending their retention.
Regular Monitoring and Reporting
Create reporting dashboards to track results against goals and budget. Next, measure the changes in results from period to period, such as how different expenses are growing from period to period in comparison to revenue growth. Then take the step to analyze and understand the causes of the variances. A best practice I’ve developed is providing the numbers dashboard with a written analysis each month that explains why goals were or were not met and an overall analysis of the trends in the business from month to month. Finally, use the information to work with the relevant teams to continue to adjust the strategy to achieve the desired results.
Regular and consistent measurement of financial metrics with thorough analysis as an ongoing process will give you the data for better decision making, exposes where you have issues that may need to be addressed, and provides a feedback mechanism to work with the stakeholders in the business to iterate strategy and drive for continuous improvement.
And if you missed it, be sure to check out Part 1: Understanding the Foundation of Financial Reporting and Part 2: Metrics and Data Needed to Measure Performance. These articles provide a comprehensive foundation for optimizing your financial practices.