Marketing Return on Investment: 7 Key Metrics to Track

By measuring and tracking key metrics, you can determine your marketing return on investment and link your efforts to bottom-line goals such as income and revenue. Following are some key marketing metrics that matter:

Leads Generated: Keeping track of the number of leads generated and the source of those leads helps you allocate marketing resources effectively.

Leads Converted: Knowing the percentage of leads that actually turn into customers enables you to home in on target prospects.

Customer Acquisition Cost: The total cost associated with persuading a consumer to buy your product or service, including research and advertising outlays, may surprise you.

Average Dollars per Transaction: Brought down to the individual customer level, this hard metric helps you assess pricing and price your products/services appropriately.

Churn Rate: Churn rate refers to the number of customers who discontinue buying or using your service compared with the total.

Retention Rate: The opposite of churn, retention measures the percentage of customers who stay with you or return and make repeat purchases. Bolstering customer retention is less costly than going after new prospects.

RFM (Recency, Frequency, Monetary): RFM analysis identifies top customers by examining how recently, how often and how much customers spend with you. RFM analysis is based on the 80/20 rule. For example, 80% of your business is derived from 20% of your customers.

Fixed and Variable Expenses: What’s the Difference?

Small-business owners must understand the differences between fixed and variable expenses and how they affect a company’s success.

All business expenses can be categorized as either fixed expenses or variable expenses.

Fixed expenses must be paid no matter how many goods or services you offer for sale.

But just because you cannot immediately change your fixed costs doesn’t mean you should ignore them.

If you can sell more products and generate more income, your fixed costs will be a smaller percentage of your overall expenses.

Fixed expenses are costs that do not change when production levels or sales volumes rise or fall.

Fixed expenses include costs such as rent, insurance, equipment lease or rental expenses, and loan repayments.

Some fixed costs, such as advertising and promotional expenses, are considered discretionary, while other fixed costs are nondiscretionary and exist even if production or sales volumes drop to zero.

Variable expenses are costs that vary directly with changes in production activity levels or sales volume. Variable expenses include things like raw materials, sales commissions, inventory, packaging and shipping costs.

Production and sales volume are the two primary factors that determine variable expenses. However, other factors, such as changes in input costs and transportation costs, also impact the level of variable expenses.

Some expenses, such as utilities and personnel, have both fixed and variable components. For example, an employee may receive a fixed base salary and also earn a variable commission based on sales volume, production quotas or quality thresholds.

Total fixed costs do not fluctuate as unit volume increases, but fixed costs per individual unit decline in this situation.

The more widgets you produce, the less each one claims as a percentage of your total fixed overhead, since the cost is spread over more units. This is not the case with variable costs. Total variable costs increase as volume increases, while variable costs per unit do not change.

As a small-business owner, a working knowledge of fixed and variable expenses allows you to determine your company’s break-even point – the number at which total revenues equal total costs. The break-even point is a key piece of information to consider when making many important strategic decisions.

This formula is the first step in performing a break-even analysis. The number of units required to break even = fixed costs / price variable costs per unit.

This equation gives a small-business owner valuable information about how costs respond to changes in the volume of goods or services produced.

It can also be used to answer other key questions, such as whether a planned expansion will be profitable, whether margins are adequate or whether price increases are necessary.

Knowing how to use this information about fixed and variable expenses is critical if you are considering expanding or developing a new product line and for determining optimal pricing strategies.

Your Balance Sheet: A Health Checkup for Your Business

A balance sheet – or statement of financial position – is a summary of your business’s financial condition at a given point in time. It lists your company’s assets, liabilities and owner’s equity. The balance sheet is one of four basic financial statements and is often described as a snapshot of a company’s financial condition.

The other basic financial statements of a business are the income statement, retained earnings statement and cash flow statement. By showing whether cash flow is adequate and by helping you identify and analyze trends, the balance sheet permits you to assess the financial health of your business.

You can perform a quick but fairly accurate assessment based on:

•    The ratio of debt to equity

•    Cash flow

•    Net gains or losses in equity and assets

•    The ratio of current assets to current liabilities

•    The property, plant and equipment figures in relation to the volume and output of the business

It’s especially important to keep an eye on trends in accounts payable and accounts receivable. Ideally, you want to maintain these at less than a 30-day turnaround. If you find your receivables cycle lengthening, you may need to step up collection efforts.

Lenders, investors and vendors look carefully at balance sheets when deciding to make loans or extend credit to your business. By understanding your balance sheet you can identify your company’s financial strengths and weaknesses.

How a Working Budget Benefits Your Business

Many microenterprises and solopreneurs believe they are too small to need a working budget.

Some start-up owners who are busy launching their operations think it’s a waste to spend time developing one.

And some small and medium-sized enterprise owners reason: “It’s just a shot in the dark, anyway.”

But no matter how small or entrepreneurial your business, you need to have a working budget.

A budget is a critical part of the initial planning stage, a crucial component of your business model and a vital tool for ongoing strategic planning.

A working budget can help an entrepreneur determine whether a new product or idea is financially viable.

It serves as a game plan for planning and timing the growth of a young business.

For an established business, a working budget is a way to monitor the firm’s financial condition and a key part of sound fiscal management.

The term “working budget” refers to the fact that the budget is a work in progress and that it will undergo modification and adjustment as time goes on.

You may need an accountant or financial professional to help you set up your budget initially, but it’s important that you be familiar with the numbers and thoroughly understand all the components of your budget.

If you are a new business owner or an entrepreneur with just an idea, you will need to do some research to come up with realistic budget numbers.

Look at similar businesses in your industry or sector and in your area.

This research will enable you to understand the market potential of your business and will help you in many other ways as you develop products, pricing, promotions and market presence.

Of course, if you are an established business owner, you can use your historical data to estimate future revenues and expenses.

Make sure that your numbers are reasonable or, better yet, on the conservative side.

And be sure that you add plenty of detail about items in your budget, including specific data relevant to your particular business.

The more detailed and thorough your budget is, the easier it will be to use it to secure funding from banks and lending institutions and support from investors.

From time to time, you will need to adjust your budget based on variances between the budgeted figures and your actual figures.

This is a good opportunity to evaluate your financial situation and tailor your business plan to help you reach your business and financial goals.

Maintaining a budget for your business on a regular basis will also help you track expenses, analyze your income and anticipate future financial needs.

Use your budget as a tool to improve and fine-tune your business – and to keep expenses in line.

By having and using a working budget you will be better able to make good decisions about your business and any new ventures you’re considering.

Essential Tips for Reconciling Your Accounts

Reconciling accounts is the process of verifying that your financial records are accurate and that your books are consistent with what your bank statement shows. You should reconcile your accounts every month to stay on top of cash flow and to avoid any nasty surprises from your bank. The following tips might make the process easier:

•    Log all expenditures, withdrawals and purchases into your books immediately.

•    Be sure to include regularly scheduled bill payments, electronic payments and automatic debits.

•    Enter every deposit promptly, whether made at the bank, at an automated teller machine, or by direct deposit.

•    Limit access to company checks and business credit and debit cards.

•    Establish clear policies for employees who expend or handle money for the company.

•    Do a spot reconciliation daily or several times a week.

•    Check your bank statement carefully and follow up on any unexplained items.

The most common outstanding items will likely be checks that have not yet cleared and deposits that have not yet been credited to your account. Other discrepancies may result from miscellaneous charges or credits, such as fees, penalties and interest earned.

If your bank charges a monthly account fee or requires you to maintain a large balance, check around for another bank that offers a free or even interest-bearing checking account. Look for a bank that offers special programs for small and medium-sized enterprises and provides services targeted to the specific needs of small businesses.

Tips for Collecting on Your Accounts Receivable

A receivables aging schedule reveals patterns of delinquency and shows where you need to focus your collection efforts.

The longer accounts receivable (AR) languish, the more likely funds are to become uncollectible.

Accounts receivable are sums due from customers from the time of sale until the receipt of payment.

The time period and the terms of every receivable should be specified clearly. Terms can be stated in various ways, such as:

  • Net 30 days from invoice
  • Net 15 days from shipment
  • 1% 10 days, net 45 days from invoice

The first term calls for payment within 30 days of the invoice date. The second term indicates that payment should be made within 15 days of the shipment date. The third term offers an incentive for early payment; for example, a 1% discount off the invoice amount if payment is made within 10 days of the invoice date. From 10 to 45 days, the customer pays 100% of the invoice.

Receivables are a use of your funds. They are, in effect, loans to customers. While every business owner hopes and expects that customers will pay their debts promptly, the reality is that AR can sometimes linger on the books until they get old.

One simple method of assessing the quality of your receivables is to compare the actual collection period, known as days receivable, to the stated payment terms. The collection period and the terms should be about the same.

If the days receivable are significantly more than the sales terms, consider developing a receivables aging schedule to monitor who owes you money, when the debt was incurred and how long it has been unpaid.

Most receivables aging schedules are broken into 30-, 60- and 90-plus-day increments. Under each of these categories, total the amount due from each of your customers. This allows you to identify the problem customers and focus your collection efforts accordingly.

An aging schedule also enables you to manage your credit policies according to the standards of your particular industry. Many software programs provide aging receivables templates and/or formulas that are handy for small and mid-size enterprises.

It is important to stay on top of your receivables. The quicker you collect your AR, the better your cash flow.

Following are some tips for collecting AR:

Be Prompt: If a payment was due in 30 days, follow up with the customer on day 31.

Be Consistent: Send regular statements to customers who are behind in their payments.

Offer Incentives: Consider offering a bonus or cash price discount for early payment.

Be Specific: Spell out any late-payment fees and penalties prior to granting terms.

Follow Up: Be aware of your customers’ payments and debts. Send acknowledgments when accounts are paid.

Be Realistic: In the final analysis, an AR aging schedule may indicate that it’s time to sever your relationship with a customer or resort to some other type of collection method.

Better to File an Extension Than an Incorrect Return

If you’re expecting a personal income tax refund, it’s smart to file your return on or before April 15 and get your refund back as soon as possible. If you can’t complete your tax return before the deadline, however, filing an extension will buy you six additional months to file the return.

It is better to file an extension than an incorrect return. You will not be fined, cited or penalized for filing a tax extension, and it will not increase your chance of being selected for a random audit. Moreover, if you use a certified public accountant or tax preparation service, you may get better service during the off-peak season as tax professionals are less busy after April 15.

Filing an extension is quick and easy “From the Internal Revenue Service (IRS) website, you can e-file a tax extension or print the forms to mail your extension. However, after the April 15 deadline you can no longer e-file your tax return.

Although filing an extension gives you additional time to file your return, it does not postpone your tax liability. If you owe money to the IRS, you are required to pay 90% of it by April 15. Otherwise, you will be subject to late-payment penalties and interest on any unpaid amount.

If you don’t file an extension or a personal income tax return by April 15 and you owe taxes, the IRS can charge you a 5% failure-to-file penalty each month the tax return is late, up to a maximum of 25% of the amount due. While personal income tax returns are due April 15, it’s also important to keep in mind that LLC, LLP and partnership returns are due on the same date, while S corporation and C corporation returns are due March 15.

A Guide to Depreciating Your Business Assets

Depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors.

Although depreciation recognizes the decline in an asset’s value, the cost allocation process used in accounting for depreciation bears little or no relationship to the actual market value or resale value of the asset.

It is simply an acknowledgment that a portion of the asset’s value has been used up in the process of generating revenue for your business.

Depreciating a business asset allows you to spread its purchase cost over the span of several years. It is a noncash expense that does not directly affect cash flow.

You can depreciate business assets that meet these criteria:

  • The item must be used in your business or to produce income
  • It must have a useful life of greater than one year
  • That useful life must be finite.

Assets begin depreciating on the date they are placed in service for the business.

You can deduct only the portion of the item that you use for business.

At some point, depreciated items are expected to wear out, break down, deplete or become obsolete.

But if you spend money to extend the item’s useful life, you can deduct that as well.

Examples would be installing more memory or a bigger hard drive in your PC, or repairing, maintaining or upgrading business machinery. The Internal Revenue Service (IRS) provides several different depreciation methods.

The simplest is the straight-line depreciation method. Using the straight-line method, you simply deduct a percentage of the asset’s cost during each year of its useful life.

The IRS considers the useful life of most information technology assets, such as computers, peripheral equipment, fax machines and copiers, to be five years.

Office furnishings are considered seven-year properties.

Other depreciation techniques include:

  • Declining Balance Method: Allows higher depreciation in the first year. with gradually decreasing amounts over time
  • Activity Depreciation: Depreciation based on the asset’s level of activity, not time
  • Units of Production Method: Useful life of the asset expressed as the number of units it is expected to produce
  • Units of Time Depreciation: Applied in cases where usage of the asset is not linear from year to year
  • Group Method: Groups similar assets with similar service lives and uses the straight-line depreciation method
  • Composite Method: Applied to a collection of dissimilar assets that have different service lives

Whichever method of depreciation you use, you must continue using it for the life of the asset. You cannot switch to a different method of depreciation.

Tax Basics: Reporting for Sole Proprietors

From the perspective of the Internal Revenue Service (IRS), a sole proprietorship isn’t a taxable entity. Assets and liabilities of the business are treated as belonging to the owner. As a sole proprietor, you report the profits or losses of your business on your personal income tax return, Form 1040. Your earnings are subject to income tax and self-employment tax, and you’re required to pay tax on income the year you earn it. At tax time, income and expenses generated by your business are reported on either Schedule C (Profit or Loss from Business) or Schedule C-EZ (Net Profit from Business) and submitted to the IRS along with Form 1040. You must pay tax on all profits whether or not you actually withdraw money from the business. There are no tax effects for transferring money into or out of a sole proprietorship.

Business Expenses: You can deduct some of the money you spend to generate income, including operating expenses, travel expenses, advertising, and a percentage of business-related meals and entertainment. You are also allowed to write off the cost of business equipment and other business assets as well as certain start-up expenses.

Self-Employment Taxes: Sole proprietors contribute to the Social Security and medicare systems through so-called self-employment taxes. Self-employment taxes are reported on Schedule SE (Self-Employment Tax) and submitted together with Form 1040 and Schedule C-EZ (Net Profit from Business).

Estimated Tax Payments: The IRS requires you to estimate how much tax you will owe each year and make quarterly estimated tax payments. Some states require this as well.

Why Good Accountants Are Wise Investments

With all the sophisticated bookkeeping, accounting and tax preparation software out there, you might think you don’t need to hire an accountant for your start-up small- or medium-sized enterprise. Think again.

An accountant is not a superfluous business expense. An experienced professional accountant who understands how to run a business in today’s economic environment can be a great asset to your business. A good accountant can provide essential support in many areas, including tax planning, strategic approaches, growth and expansion strategies, budgeting, financial forecasting, evaluating new business ideas, and, of course, keeping your financial records in order.

Although hiring an accountant may cost you up front, you’ll likely recoup the investment many times over. A good accountant can often find numerous ways for you to shave expenses, structure transactions, time payments and save money. Moreover, many accountants offer fixed or scalable fee structures, and some are willing to arrange their fee structures according to your cash-flow circumstances.

There are many benefits to using a professional accountant. The following are some examples:

Tax Savings: A qualified accountant possesses knowledge, training and experience in tax planning and tax strategies as well as in tax preparation. Often they can recommend legitimate ways to reduce your tax obligations.

Improved Profitability: In addition to overseeing the accounts, an accountant can assist you with budgeting and advise you on forecasting cash flow. You may be able to improve cash flow through better management of inventories, payables and receivables. As your business grows, your accountant may suggest ways to manage or direct growth to maximize profitability.

Up-to-date and Accurate Accounts: Timely, accurate financial information is crucial for all businesses. Knowing where you stand financially will enable you to understand your business thoroughly and optimize your business performance through economic cycles. This is especially critical if you are looking to expand, diversify or add new lines of business.

Expert Business Advice: Whether you’ve just started out or are on a growth trajectory, an accountant with knowledge of best practices and business conventions across a spectrum of industries is a source of quality professional advice.

Referrals and Business Networks: Don’t underestimate the value of being part of an accountant’s business network. Accountants who work with other small businesses can keep you abreast of trends and issues and also refer clients and vendors to your company.

Stay Ahead of the Curve: A savvy accountant will be aware of current legislation affecting small businesses and will make sure that you comply with legal requirements in an appropriate, timely and efficient way.

Spend Your Time on What’s Important: Financial matters can be frustrating and time-consuming. Delegating accounting and bookkeeping tasks to a pro frees up your time so that you can concentrate on making your business successful.

Gain Peace of Mind: Knowing you have a great accountant on your team will help you sleep better at night, secure in the knowledge that your business finances are in good hands.