By Erez Saf, Pymes Capital President
As we start to plan our budgets and strategies for 2023, we should pause and consider how financially productive our business is. How are we evaluating our progress? What methods can we use to track and improve our performance throughout the year?
Regardless of the size of the company or the industry, every business should insist on developing straightforward, observable metrics that may help the board, management, and team understand how the company is doing, the strengths and limitations, and what we should aim to accomplish.
What Is My Revenue Status?
Although most business owners are aware of the high and low seasons, it is a good idea to plot your revenue and expenses on an annual graph since they can give you information about how your company is operating. The three categories into which the majority of businesses fall are as follows (with illustrations from actual Mexican businesses):
Steady income: Is your revenue distributed similarly over the course of the year?
Businesses with steady revenue are strong and should concentrate on cost reduction while exploring various growth methods with minimal investment until they identify a successful plan to concentrate on. The graph below shows an illustration of this type of revenue.
Yearly Cycle Income: Is your revenue consistently high in certain months and then declining? Businesses with sales cycles should coordinate their growth investments with their peak months and make sure to reduce expenses during their declining periods. Depending on the stage of your business cycle, you can use the many SaaS solutions available on the market to increase revenue or decrease expenses. This form of revenue is exemplified in the graphs below.
* Five to 10 months cycle over 36 months.
*Four-month cycle over 12 months (December contains partial data)
Growing business: Do your sales increase consistently throughout the course of the year?
Growing pains are frequently experienced by a growing business and should be expected and addressed before a crisis arises. As your business expands, your expenses and inventory costs will rise as well. Typically, there will be a gap between the time you make a purchase and the time you make money. There are an increasing number of financing options available to fill those gaps and support growth. An illustration of this is given in the example that follows.
*December contains partial data
How to Measure My Business Performance?
Besides the evident cash on hand or in the bank, a set of numbers known as financial indicators pertain to a company’s performance and financial health. These numbers show the true state of the business, enabling strategic choices. It is crucial to check these numbers when analyzing performance.
Cost of sales
Cost of sales should include all costs that are directly related to the sales process, including marketing expenses, inventory, and sales personnel.
Lifetime value (LTV)
What is the expected value from a client? If it is a single transaction, then it is the sale’s value. If it is an ongoing relationship, it is the revenue that this customer generates for the expected time he will be purchasing your services or goods. For example, if the average customer in a restaurant pays MX$500 for dinner, and 50 percent of your customers return three times on average, you can calculate the LTV of your customers to be MX$500×3=MX$1,500
Profit margin
The challenging aspect now is to subtract the cost of sales from your LTV to determine your potential profit margin for each client. If at any point your profit margin is negative, it means you are losing money on every sale you make. In this situation, you must make a change, such as raising pricing or reducing expenses. If your profit margin is positive, you can calculate how profitable each sale is. It’s also a good idea to check the profit margin for volume sales discounts or end-of-year sales to make sure it’s positive and appropriate for the volume you sell.
Working capital
This describes how much capital may be put into a business without endangering its ability to maintain liquidity. It represents the difference between current assets and liabilities of a business. Inventory, cash on hand and accounts receivable are examples of assets. Any debt, supplier invoices, or expenses are all considered liabilities.Working capital acts as a forecast of growth and development, making it a crucial indicator of a company’s capacity for expansion. Looking at the working capital variances over the last three years for the same date is a useful exercise. Working capital fluctuation can provide insight into how well a business is expanding.
*An example of a working capital shift that was favorable in 2019 and 2021 and negative in 2020.
Cash flow
This is the process of subtracting expenses from income. Because it indicates whether a corporation is operating effectively, it is a good indication for evaluating the direction the company is headed. In this regard, it is vital to evaluate whether the income surpasses expenses.Churn
This is the rate at which customers stop using a company’s products or services. In SaaS, the number of subscribers who cancel or do not renew their subscriptions may also be considered as churn. Your company’s churn rate increases when more customers stop making purchases from it.How to calculate:
Choose a period of time, for example 2022. Divide the number of lost clients by the total number of new clients acquired in 2022.For example, if you obtain a total of 120 new clients in 2022, and you lost a total of 24 clients through the year, your churn will be 24/120 = 20 percent.
Economic Forecasts Overview for 2023
The OCDE forecasted a 2.1 percent increase in PIB growth for Mexico in 2022, and a 1.5 percent increase in 2023.
It is important to note that the Mexican economy will not be the only one to experience a slowdown in growth. The issue is global because, according to the same data, global growth is predicted to be 3 percent in 2022 and 2.2 percent in 2023.
Although there is confidence that the labor market will improve, inflation will represent an obstacle, since it is estimated that by 2023, the annual percentage will fluctuate between 5 and 5.7 percent.
Preparing Your company for Growth and Success in 2023
As we see a turbulent future with expectations for a challenging 2023, businesses must determine what changes need to be made within the organization to be ready for the storm. A thorough planning depends on data and the capacity to comprehend the challenging environment the organization is facing. I’m hoping that this article will help readers better understand financial performance and give them the tools they need to make strategic decisions.