Breathing life into a company is a tremendous feat. There is so much time, energy, and resources that go into building a functioning business out of nothing but an idea. Many entrepreneurs fail before even reaching this milestone, which makes the accomplishments of those that have had initial success even more monumental.
But initial success is not an indicator of a smooth journey. The next milestone that entrepreneurs should aim to reach is leading their company through its first year. If you can make it through your first year, you have a more solid foundation to stand upon as you enter into year two, year three, and even year five.
The unpredictability of small business success often leads entrepreneurs to desperately scramble in an attempt to discover signs or metrics that will predict whether or not they will become a profitable business down the road. Use these metrics in order to measure whether you are setting yourself up for financial success:
What is your growth rate?
One indicator to measure if a business is progressing in the right direction is to measure growth rate. This number will look differently during the first few years of business, but you can begin to see a pattern as you continue to build out a more developed company. Businesses that grow at a 25 or 30 percent rate past their first few years are on track for a profitable future.
Just because you are experiencing positive growth does not mean that you can just rely on the upward trajectory to propel you forward and upward, though. You must constantly review and revise your business strategy if you want to reach new levels of success.
How long do you keep your customers?
Without customers, it is impossible for you to make any sort of profit. A customer who is loyal to your company is ideal, however, not every customer you have will be a permanent fixture of your business. This is why it is important to know your churn rate, which is the number of customers who no longer require your products or services. During your first few years in business, this number will be more of an estimation that you can use to predict patterns in the future.
How quickly are you spending your venture capital?
Starting a business requires ample funding, which many entrepreneurs don’t have access to without outside help – whether it be from a company that provides capital to small businesses or from a family or friend who has some additional money to invest in your idea. Once you acquire finances in order to support your business, it’s important that you be fruitful with your money, trying to avoid running out of money before you need to raise another round of funds. This is often referred to as your cash burn. You want to track your cash burn with the finances you currently have so that you can anticipate when you will need additional capital. Once you can predict this, you can look into securing money in the most advantageous way, rather than waiting until you are desperate, which will only work to encourage a dangerous cycle of financial disparity.