Like you, I work with many small business owners. When it comes to operations, they know their businesses inside and out. But they often overlook important financial metrics that could cost them growth, profitability and customers. By helping owners shore up those metrics, you can help them boost their enterprise value and add more value to your relationship. Here are six key metrics you'll want to keep an eye on:
1. Customer acquisition cost: Quite simply, CAC measures how much a business spends on sales and marketing to acquire each new customer.
Calculation: CAC = Total Sales and Marketing Costs / Number of New Customers Acquired
If your clients' CAC is high, they are losing money on every new customer they bring in. CAC helps you and your client determine how efficient their channels and content are, and the ways they target customers.
A CAC under six months is ideal. This means your client is recouping its customer acquisition investment within six months of acquiring the customer. A payback period of six to 12 months is acceptable but requires careful cash flow management. A CAC over 12 months is difficult to sustain and indicates inefficient acquisition strategies that need immediate attention.
How you can help improve CAC:
- Eliminate underperforming marketing channels. Analyze which channels have extended payback periods and reallocate the money spent on those channels to those delivering faster returns.
- Focus marketing dollars on the most profitable customer segments. Run an analysis to identify which customer types are easiest to acquire and most likely to become long-term clients. Then concentrate resources on targeting similar prospects. This focused approach typically delivers better results than broad-based marketing.
Streamline the sales process to close deals faster. Every extra week in the sales pipeline increases acquisition costs. Identify bottlenecks such as slow proposal delivery, delayed follow-ups and implement solutions that help move prospects through to close more efficiently.
2. Customer lifetime value: The lifetime value refers to the total revenue expected from a customer over their entire relationship with your client's business. LTV is very helpful for understanding long-term profitability, CAC and customer retention strategies.
Calculation: LTV = Contribution margin (M) * years a customer stays with a company (T)
Having an LTV:CAC ratio of 3:1 or higher is excellent. This means each customer generates at least three times what you spent to acquire them, so you have sufficient margin to cover operating expenses and generate profit. A ratio of 1:1 or below means your client is losing money on customer acquisition and this needs to be addressed ASAP.
How you can help improve LTV:
- Implement annual prepay discounts that lock in longer commitments. Offering a modest discount for annual pre-payment instead of monthly creates a win-win: Customers save money, and the business secures longer-term revenue while dramatically reducing churn risk.
- Identify the "danger zones" where customer churn spikes. Your client is likely losing clients at certain milestones such as 30 days, 90 days or at contract renewal time. Encourage your client to conduct personalized check-ins or success reviews at these times to reinforce value.
- Segment customers by true profitability, not just by revenue. As with your clients, some small business customers cost more to serve than they're worth. Calculate each customer's LTV after accounting for service costs. Then help your client decide where to invest retention resources for maximum return.
3. Free cash flow: Unlike net income, which includes non-cash items such as depreciation, FCF measures the actual usable cash a company generates — i.e., the amount of cash a company has left over after paying for its operating expenses and capital expenditures. FCF is considered a good indicator of a company's financial health and ability to generate cash. Positive FCF gives business owners flexibility and options; negative FCF implies vulnerability and dependency on financing.
Calculation: Operating Cash Flow − Capital Expenditures = Free Cash Flow. FCF of 10% to 20% of revenue is ideal for most small businesses. This indicates the business is generating sufficient cash to reinvest in growth, pay down debt, or distribute to owners. FCF below 5% of revenue may indicate cash flow challenges, while consistently negative FCF is unsustainable without external financing.
How you can help improve FCF:
- Shift billing models to capture cash earlier. Move from monthly to annual billing, or from net 30 to net 15 terms.
- Renegotiate payment terms with major vendors. Simply asking vendors to extend terms to net 60 from net 30 costs your client nothing but provides a permanent boost to working capital. Focus on the largest vendors where even small changes to terms create meaningful impact.
- Evaluate lease versus buy decisions. Large equipment purchases drain cash immediately, while leasing spreads the cost over time. Help clients understand when each option makes sense based on their cash position and the urgency of the investment.
4. Return on invested capital: ROIC shows how well a company generates cash from the money it invests in its business. Companies able to achieve high returns create value and are ready for growth. High ROIC businesses can fund growth internally and are attractive to investors or potential buyers.
Calculation: ROIC = Net Operating Profit After Tax ÷ Invested Capital
ROIC of 15% to 20% or higher is excellent. This indicates the business is generating strong returns on every dollar invested. ROIC above the company's cost of capital (typically 8% to 12% for small businesses) means your client's enterprise is creating value. ROIC below the cost of capital erodes value over time.
How you can help improve ROIC:
- Eliminate low-performing products or service lines. Every business has offerings that consume disproportionate resources while delivering minimal returns. Use profitability analysis to help owners identify lagging products and services. Discontinuing laggards frees up capital for better uses.
- Test strategic price increases on products with strong market position. Most small businesses underprice their best offerings. Even modest increases for products that customers value can boost ROIC without sacrificing volume.
- Evaluate whether to outsource capital-intensive activities. If the business can outsource low-return functions such as delivery, warehousing or manufacturing, and redeploy that capital into higher-return core activities, the overall ROIC improves dramatically.
5. Cash conversion cycle. CCC measures how quickly customers pay your client's business, compared to how long it takes the business to pay its suppliers. CCC is critical for businesses with inventory.
If customers pay quickly, and the business manages its inventory well, and takes its time paying its suppliers, then free cash flow can be consistently positive, even when net income is not.
To calculate CCC: Average days inventory is held + average days customers pay – average days business pays suppliers.
The lower the CCC, the better. A CCC of 30 to 45 days is generally healthy for most SMBs. Negative CCC (in which suppliers are paid after collecting from customers) is ideal, but rare for small businesses. CCC over 90 days often indicates collection problems, excess inventory or overly aggressive supplier payment that strains cash flow.
How you can help improve CCC:
- Negotiate extended payment terms with key suppliers. Moving from net 30 to net 45 or net 60 significantly improves working capital. It costs nothing to ask.
- Implement just-in-time inventory practices for high-volume items. The products that move fastest typically represent the largest inventory investment. Moving these products to more frequent, smaller deliveries frees up significant working capital.
- Scrutinize slow-paying customers. Customers who habitually pay far beyond terms are essentially using the business as their bank. Help calculate the true cost of these relationships and decide whether to tighten terms or exit the relationship.
6. Earnings before interest, taxes, depreciation, and amortization: EBITDA measures a company's overall profitability by adding back interest, taxes, depreciation, and amortization to its net income. EBITDA provides a clearer view of a company's profitability from its core operations, excluding the effects of financing and accounting decisions.
Calculation: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA margins of 10% to 20% are generally healthy for most small businesses, though this varies significantly by industry. Service businesses often achieve higher margins (15% to 25%), while retail or manufacturing may run 5% to 15%. The key is to make sure EBITDA is positive and growing, demonstrating operating profitability. Small businesses are typically valued on a multiple of EBITDA (commonly 3x to 6x for small businesses, depending on industry and growth).
How to help clients improve EBITDA:
- Conduct systematic expense reviews focused on the largest cost categories. Typically, the top five to 10 expense categories represent 70% to 80% of total costs. Even small percentage reductions in those categories can create meaningful EBITDA gains.
- Properly adjust EBITDA for owner discretionary expenses. When preparing for a sale or financing, help present "normalized" EBITDA that excludes personal expenses run through the business. This shows true earning power and can significantly impact valuation.
- Evaluate facility costs and space utilization. Real estate is typically one of the largest fixed costs for business owners. Consider whether the business could operate effectively from less space, especially with remote workers increasingly common.
By moving beyond basic compliance work to strategic advisory services, you can deliver tremendous value to your clients while building a stronger, more profitable practice.
