Three Critical Numbers Every Business Owner Needs to Know

In the course of running a business, the most urgent numbers often seem like the next payroll date and the balance in the checking account. While these numbers are crucial for short-term survival, there are three other numbers that are essential for long-term growth and sustainability:

1. Enterprise Value
2. Revenue (and Profit) per Customer
3. Revenue (and Profit) per Employee

Understanding these numbers helps keep critical factors in focus and directs attention to what matters most in a business. Let’s explore each of these in more detail.

Enterprise Value

The primary purpose of a business is to grow value and create a return for its shareholders. As the owner of a privately held company, you are likely the main shareholder. The return you receive from your business is similar to the return on a stock in your portfolio, comprising two elements: dividends and growth in value.

While dividends are evident through salary, perks, and distributions, enterprise value is less visible. Yet, realizing the growth in value of your company is what sets an owner apart from an employee (beyond risk and responsibility).

Research by the Exit Planning Institute reveals that 83% of business owners who attempted to sell their businesses were unsuccessful, meaning only 17% managed to unlock their business's value. The remaining 83% faced the reality of either continuing to run their business or, worse, closing it down with disappointment.

Why do so many business owners fail to realize their business's value? While specific data may be scarce, it's likely that most of these owners were unaware of their business's value five years prior to attempting a sale. Some simply didn’t know, while others may have greatly overestimated or underestimated it based on hearsay. This lack of insight prevented them from focusing on value growth, making their businesses unattractive to buyers or unable to command an offer that could sustain their lifestyle post-sale. (Consider the 4% rule: How much would you need to invest in a conservative 4% portfolio to maintain your lifestyle?)

Enterprise value reflects both the quantity and quality of your profit and indicates the level of risk and confidence a potential buyer feels when evaluating your business. Owners who focus on enterprise value are prepared, while those who don’t often face disappointment.

If you’re unsure of your business's value, we can assist. Contact us today to learn about an efficient and cost-effective way to determine your business's market value.

Revenue (and Profit) per Customer

Revenue that turns into profit is the lifeblood of a business. This metric measures how effective your company is at expanding business within your current customer base. To calculate it, you need:

• Total Revenue (and Profit)
• Number of Active Customers

While determining the number of active customers may vary by business, consistency is key.

In my first book,?Revenue Growth Engine?, I explain how the number of customers represents your success in acquiring net-new business, while revenue per customer demonstrates your cross-selling effectiveness. Together, these figures indicate the power and versatility of your growth engine.

If your revenue or profit per customer drops, it should trigger immediate concern. Conversely, rising numbers likely signify growth in enterprise value.

Revenue (and Profit) per Employee

I recently met with a business owner struggling with profitability. When I asked about their revenue (and profit) per employee, they didn’t know. This metric is vital because it indicates a business's efficiency and effectiveness.

Calculating it is straightforward: divide total revenue by the number of employees. In this case, the result showed why the business was barely afloat, highlighting its risk of failure. To build sustainability and increase enterprise value, the company needed to boost revenue, improve efficiency, or reduce its headcount.

There are various ways to improve revenue per employee. The?Process Optimization Engine??can help identify opportunities for increasing both efficiency and effectiveness. But if you don’t measure revenue per employee, your focus may be on short-term concerns—like making payroll—without addressing the underlying issues.

Action Items

Here are three practical steps you can take today:

1. Know Your Numbers?Revenue per customer and revenue per employee are straightforward calculations. Determining enterprise value may require more effort, but understanding it gives clarity on how to grow your business's value. (If you don’t know your company’s value, schedule a consultation.)
2. Know What Best-In-Class Looks Like?To set targets, understand what top performance looks like in your industry. This can guide your strategic planning and help you realize what's possible. For example, in 2023, the top 25 U.S. Fortune 500 companies achieved an impressive average profit per employee of $490,000.
3. Develop a Value Creation Plan?Use these numbers to shape or update your strategic plan. What are your goals for each area? What strategic pillars need to support these goals? What objectives and key results (OKRs) will you implement to achieve them?

Conclusion and Call to Action

Understanding these three critical numbers—enterprise value, revenue per customer, and revenue per employee—can set you on the path to maximizing your business's potential. If you're ready to take the next step in unlocking your company’s value, we’re here to help.

To get started, Schedule Your 30-Minute Value Creation Briefing and explore how upgrading your Value Creation Engines can help you achieve more from your business. Take advantage of a complimentary session with a Value Creation Guide today!