December 28, 2022
The fate of many businesses is in the doldrums as the world gets ready for the upcoming recession. As the cloud of uncertainties takes over many business owners, we thought of sharing our two cents about a few ways we can play smart to endure this inevitable ordeal. So instead of taking the obvious route of businesses that thrive in a recession, let’s understand how to cultivate a recession proof business 2023.
It will be an elaborate read. But certainly worth your minutes.
Generally, companies drop their marketing spend during a recession when they should rather be increasing it. During these times, marketing costs go down as fewer people advertise. So, keeping the same budget can give you a higher reach. The catch here is to monitor the below mentioned key marketing metrics as customer buying tendencies may fluctuate.
Cost per Click (CPC): This KPI shows if you can save some money on paid ads. The cost per click shows how much you pay when your ad is clicked. CPC is used to assess the cost-effectiveness of an ad campaign.
CPC = Ad costs / Number of clicks
Cost per Lead (CPL): Cost per lead is similar to cost per action, except that you pay for the contact information of a person potentially interested in your offer.
CPL = Ad costs / Number of acquired leads
To calculate this metric, add all your ad expenditures on the way to registration for gated content, for instance, and divide the total expenditures by the number of acquired leads. This metric will show you if your lead acquisition efforts fall within your budget or if you’re spending too much. Keep in mind that a lead is only halfway to being a client and isn’t even a loyal follower.
Return on Ad Spend (ROAS): Simple and understandable, this is one of the most important digital marketing metrics for measuring ad performance. Return on ad spend is the amount of revenue your business gets for every dollar spent on ads. Use it as the main metric for each digital marketing campaign and you’ll feel the difference between effective and ineffective campaigns.
ROAS = Revenue derived from the ad / Cost of the ad of investment )× 100%
Customer Lifetime Value (CLV): Customer lifetime value can be historical (the sum of all profits from the purchases a customer has made) or predictive (the total revenue your business expects to get from the relationship with this customer).
CLV = Average gross margin per customer / (Customer retention rate / 1 + Rate of discount — Customer retention rate)
It is important not only to have a great operations team but also to monitor and track the key operations metrics. Inflation and demand have made the employee salary cost high. The key metrics to monitor here are –
Absenteeism Rate: How many days annually are your employees calling in sick, or just flat-out missing shifts? This operations metric helps identify employees that are disengaged at work so that you can bring them back to being an engaged employee. Engaged employees tend to work harder, have a higher retention rate, and help workplace culture flourish.
Utilization Rate: Are your employees always working? Or are they waiting for work? Working on non-billable tasks? The ‘utilization rate’ operations metric tracks how much an employee is actually working to make the company money. This is a key metric for professional services and consulting firms.
Customer Satisfaction: This needs to be measured either after every project closure or once every month. It is a great indication of how good is your ops team.
Inflation has increased the COGS (Cost of Goods Sold). Maintaining high inventory levels is non-optimal for goods-based industries. The key metrics to monitor here are –
Throughput: It measures the rate of production of a machine, line, or plant over a time period. This helps the operations department determine its ability to meet production deadlines.
Demand Forecasting: This operations metric is used by companies to estimate the amount of raw material they will need to meet future customer demand.
Changeover Time: It fundamentally represents the amount of time required to switch from one task to another. Common examples of this are changing products on a production line, or staff during a shift change.
Inventory Levels: Inventory of raw materials as well as finished goods need to be monitored closely. Piling of inventory needs to be avoided.
With Major economies in recession already it is critically important to manage your customer support. If this is done well you can sail through this rough period. Key metrics to monitor customer support are –
Issue Response Time: The time between when the client first reports a problem and when it is resolved.
Issue Resolution Time: The average time between the creation and resolution of customer interaction.
Customer Satisfaction Tracking: Measuring how satisfied customers are with products, services, and capabilities that a company offers.
The metrics below are typically found in the financial statements and are among the most important for managers and other key stakeholders within an organization to understand.
Gross Profit Margin: Gross profit margin is a profitability ratio that measures what percentage of revenue is left after subtracting the cost of goods sold. The cost of goods sold refers to the direct cost of production and does not include operating expenses, interest, or taxes. In other words, gross profit margin is a measure of profitability, specifically for a product or item line, without accounting for overheads.
Gross Profit Margin = (Revenue – Cost of Sales) / Revenue * 100
Net Profit Margin: Net profit margin is a profitability ratio that measures what percentage of revenue and other income is left after subtracting all costs for the business, including costs of goods sold, operating expenses, interest, and taxes. Net profit margin differs from gross profit margin as a measure of profitability for the business in general, taking into account not only the cost of goods sold, but all other related expenses.
Net Profit Margin = Net Profit / Revenue * 100
Quick Ratio: The quick ratio, also known as an acid test ratio, is another type of liquidity ratio that measures a business’s ability to handle short-term obligations. The quick ratio uses only highly liquid current assets, such as cash, marketable securities, and accounts receivables, in its numerator. The assumption is that certain current assets, like inventory, are not necessarily easy to turn into cash.
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Operating Cash Flow: Operating cash flow is a measure of how much cash the business has as a result of its operations. This measure could be positive, meaning cash is available to grow operations, or negative, meaning additional financing would be required to maintain current operations. The operating cash flow is usually found on the cash flow statement and can be calculated using one of two methods: direct or indirect.
The key metrics to monitor sales performance are as below –
Total Revenue: Arguably the most important metric of any business is revenue. Total revenue can be measured on any time scale, typically monthly, quarterly, or annually.
Annual Recurring Revenue, or ARR, is a common metric of sustained RevOps performance. Similarly, Monthly Recurring Revenue, or MRR, is an equivalent metric on a shorter time frame. ARR is a great metric for predictable revenue when reps are closing multi-year contracts and retention rates are high.
Percentage of Revenue from New vs. Existing Customers: Understanding what percentage of revenue is from new and existing customers is helpful for a few reasons. For example, if existing customers account for a growing percentage of total revenue, this can be an indicator your RevOps team is doing a great job of upselling and growing accounts, but the team tasked with acquiring new accounts is lagging behind.
If new customers are the lion’s share of your revenue, then this could either be an indicator of a high churn rate or hyper growth. To understand at what end of the spectrum your team is trending, it’s important to track LTV, NPS, and more, which we will discuss further in this blog.
Win Rate: Win rate, or the opportunity-to-win ratio, is the measurement of successful deals or deals that close, in comparison to the total deals made – including those that are open, lost, slipped, or in another pipeline phase. Basically, the win rate measures the ability of a sales team to conclude negotiations.
There are a number of factors that contribute to a sales team’s win rate, many of which are covered later in this article.
Year-Over-Year Growth: Although growth can be measured over any timeframe – such as month-over-month, quarter-over-quarter, or year-over-year – annual growth showcases high-level execution of strategy and whether long-term growth goals have been achieved.
To calculate the year-over-year (YOY) growth, let’s assume that revenue last year was $50 million and the current year’s revenue has grown to $75 million. So, the formula to calculate the YOY growth will be –
[($75MM – $50MM) / $50MM] * 100 = 50% YOY Growth
Net Promoter Score (NPS): What is the likelihood that your customers will recommend your product or service to their network?
This question is what sales professionals have in mind when they measure net promoter score, where they ask each customer the likelihood of them promoting their business through word of mouth from 1 (not very likely) to 10 (very likely).
NPS can be a proxy for customer satisfaction, as we can assume one would only share a product, service, or business they trust and respect. Your champions are those that reported 8-10 on your NPS survey, and detractors are those who reported 7 or lower.
Target / Quota Attainment: Quota attainment tells you whether a sales rep has reached their sales quota within a given time period and what percentage of their quota they have reached. This is an important metric to measure because low quota attainment rates can be a symptom of more complex issues within the sales team, including inadequate coaching, rep ramping, and capacity planning.
A natural next question for any sales leader or sales manager is what percentage of sales representatives are reaching 100% of their sales target?
Pipeline Coverage: Salespeople at all levels must understand the health of their pipeline compared to their quota. This sales metric will be a leading indicator towards quota attainment – if you don’t have an adequate pipeline to cover your quota, it’s going to be extremely difficult to achieve your goal.
Deal slippage can interfere with the results of this metric because if your reps mark an opportunity that slipped from the last period as committed this period, it can offer a false sense of coverage.
This is considered to be a very touchy and controversial topic to discuss. But if your situation demands it needs to be done for the greater good. Here are some best practices to consider while confronting a layoff situation –
Define business reasons and criteria: Executive management should define the business reasons for layoffs so they can be consistently articulated throughout the process. Communicating the business basis is key to protecting the company’s credibility and complying with employment laws.
Leaders should establish a systematic process with specific criteria for those who will be laid off based on business goals. Clear and objective standards should be used such as tenure, performance review ratings, job classification, attendance and skill sets. Consider whether to lay off one person from each department or an entire group. Identify any employees needed for a transitional period and determine how long they should stay.
Analyze and review selections: It is critical for leaders to analyze and review the list of employees selected for layoffs, especially those related to protected classes. If the percentage of any protected class is disproportionately terminated, measurable criteria should be available to substantiate the choice. For instance, the cost of pay as the criteria can affect many workers over age 40. It is best to consult with an HR professional and/or employment practice attorney.
Consider severance packages: Businesses that offer severance packages are making a strategic decision that helps alleviate some of the stress for affected employees and may reduce the chances of legal action. Severance packages can include a number of benefits that support workers during a transitional period such as salary continuation, vacation pay, continued benefits coverage, outplacement assistance and employer-paid COBRA premiums. Some states have mandatory severance criteria, so leaders should conduct further research.
Leaders should take care while deciding severance packages, as the objective is not only to help employees through a difficult time but also to generate goodwill for employers.
Communicate the layoffs: It is important for leaders to work closely with the corporate communications team to develop accurate and clear messaging that includes the business reasons for the layoffs, which will be used for the official announcement and press release, internal communication, individual and group meetings. All employees should be notified about the layoffs via a company meeting and email, and then individual meetings should be conducted with employees who will be laid off. Affected employees should be reassured that it is not a reflection of their performance or their fault.
Layoff at one Go: It is very important to do this at one shot instead of batches.
A cornerstone of a company’s financial health is the success of its budgeting. It’s critical, especially in today’s uncertain marketplace, that an organization’s plans for the future are based on detailed data analytics, taking into account where it has been and where it’s going.
Budgeting is a business’ guide and roadmap for achieving goals. It projects, manages, and provides data intelligence into the revenues and expenses of the organization. Because cash is a critical resource, it must be managed correctly.
Understanding your numbers is knowing your business. You must know your business in order to make the best decisions.
Budget Variance: This compares the company’s actual performance to budgets or forecasts. Budget variance can analyze any financial metric, such as revenue, profitability or expenses. The variance can be stated in dollars or, more often, as a percentage of the budgeted amount. Budget variances can be favourable or unfavourable, with unfavourable budget variances typically shown in parentheses. A positive budget variance value is considered favourable for revenue and income accounts, but it can be unfavourable for expenses. The formula for calculating budget variance is:
Budget variance = (Actual result – Budgeted amount) / Budgeted amount x 100
Budget Creation Cycle Time: This efficiency metric measures how long it takes to complete the organization’s annual or periodic budgeting process. It’s usually measured from the time of establishing budget objectives to creating an approved, ready-to-use budget. This metric is usually calculated as the total number of days.
Budget creation cycle time = Date budget finalized – Date budgeting activities started
Line Items in Budget: The number of line items in a budget or forecast is an indicator of the level of detail in the budget. A company can prepare its current budget by adjusting each line item in a previous budget to reflect current expectations. Budgets are often prepared at the account level or by the project. They may include line items that correspond to lines in the company’s financial statements.
Number of Budget Iterations: This is a measure of the accuracy and efficiency of the company’s budgeting process. It is the number of times a budget is reworked during the budget creation cycle. A highly manual process can be more error-prone, leading to a greater number of iterations before the company arrives at an accurate budget. Other reasons for an increased number of iterations include extensive internal negotiations, changes in business strategy or changes in the macro-economic climate. A high number of budget iterations can lead to delays and an increased budget cycle time, which can hinder the company’s ability to start executing toward the goals defined in the budget.
Number of budget iterations = Total amount of budget versions created
Battling a recession isn’t easy. You may have to double down on your efforts. Tough decisions will have to be made. Hold that thought of googling the best business during recession. Because when you are in a business, persistence is the name of the game.
Pragmatic Techsoft has many years of experience providing services in Odoo ERP modules. We have helped businesses around the globe streamline their operations through advanced automated systems. With our proven software products and technical support system, you can simplify routine tasks and focus more on the things that need your immediate attention.
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