Getting an investor onboard is an achievement, but the work doesn’t stop there. Investors are often shrewd business men and women who want to ensure their money is in safe hands. They need regular updates and metrics, and things may not end well for business owners who aren’t prepared to answer their questions. Don’t make the mistake of taking investors for granted. The future of the business may depend on them.
Depending on the investors’ background and expertise, they may have different questions in mind. Make sure everyone’s on the same page. Ask them what sort of information they need and how frequently it should be provided. Also, clarify whether they want to have regular meetings or if just an email will suffice. All these details should be discussed before the investment is finalized. That way, expectations are aligned.
While certain metrics vary according to the nature of the business and requirements of investors, other parameters remain the same. Some of these common performance indicators include the following:
1. Return on Investment
When pitching a business idea, entrepreneurs assure investors that they’re going to get more than just their initial investment back. Venture capitalists may trust their gut about the business owner, but they also need concrete information and metrics about the gross vs net profit. Even if the business is doing well, high operating costs can adversely affect the bottom line. Only evidence-based data can show the big picture. You’ll have an easier time demonstrating if you’re already organized with a tool like accounting software.
For example, a small café bustling with customers seems to be doing well from the outside. However, if the ingredients for their exotic cappuccino make up a large portion of the retail price, things may go downhill soon. If the supplier hikes the price of the coffee, they might not even break even. It’s acceptable to have a slow start but if revenue milestones aren’t reached on time, it can be a red flag. The café owner should know exactly how much footfall is required to achieve their targets.
2. Customer Conversion Rate
If a marketing campaign is successful, a business can get a surge in visitors. However, getting their foot in the door is just half the battle. The next step is to convert these curious individuals into paying customers. While website traffic is an indicator of potential customers, investors want to know how many online visitors bought something.
Similarly, business owners should keep an eye on the churn rate, that is the percentage of lost customers. If a customer does not return to the same business again, there must be a reason behind it. Find out and fix it. Perhaps shipping was too high that they did not complete the check out. Building trust with customers can translate into building trust with the investors. Once customers become loyal patrons, they often bring their friends with them, thereby increasing revenue for the business.
3. Break-Even Point
Every new business takes some time to settle into consistent sales. Sometimes it can take several months — or longer — to recuperate initial launch costs. A slow start is acceptable, but investors need to know when the business is expected to pick up speed. It is only when the revenue exceeds operating costs can a business be called profitable.
This break-even point is one of the most important metrics to assess the trajectory of a new business. Reaching this point can boost the confidence of both the owner and the investor. Although this can be motivating, it’s not the end goal. Study the variables of the break-even point to understand the factors affecting profitability.
4. Operating Expenses
Home-based businesses may often underestimate operating costs. They may think they would pay utility bills regardless of their business but forget about the additional electricity and water usage. Be careful about these hidden expenses. Keep a strict eye on the inflow and outflow of cash for every business transaction to understand the dynamics completely.
Investors can often understand if there’s a sudden unanticipated change in operating costs. However, it should be an exception not the norm. The government may levy additional taxes, or the landlord may hike up the rent unexpectedly. While these changes cannot be controlled, monitoring trends in operating expenses can show warning signs. Be proactive and plan for any new expense in advance, so the revenue isn’t affected. Have a savings account for such unforeseen circumstances.
5. Market Share
If revenue generation stays stable, the market share of the business can grow. This is calculated as the percentage of industry or niche markets held by the business. The goal is to keep attracting and retaining customers, so the business becomes the go-to brand in that category. To attain this, quality cannot be compromised. The market share increases only when the business cultivates a good reputation.
It also shows investors how the business is faring compared to competitors. If an event planner’s schedule is free during graduation season, it could be something to worry about. Know what competitors are offering and learn from both their wins and losses. There are many ways to skin a cat, and a smart business owner should know them all.
As the business grows, some metrics may become obsolete, and newer ones may be added. The only thing that should not change with time is the reliability of the business owner. The business operations becoming busier is not an excuse to become laid-back. Stick to the deadlines, and provide an explanation if reports are delayed for any reason.
Maintaining a healthy relationship with investors can help the business acquire more funds on their own terms. It makes investors believe in the business’ performance and potential. Transparency breeds trust, which can lay the foundation for faster growth in the future.
