A business plan is part of the planning process for new startups or enterprises looking to expand into new market sectors. You’re more likely to secure funding when armed with a well-executed business plan, besides helping to map your business’s goals and objectives.
But when including precise details that ensure financing eligibility, there are key metrics to include in your SBA business plan. Not only do these assist in keeping your application within the lender’s requirements, but they convince investors of your absolute knowledge of the business’s operations.
In this article, let’s examine all the key metrics you should include in your SBA business plan, including revenue projections and liquidity strategies. That’s how you’ll ensure that all relevant data is kept on track and that you’ve identified issues for which you’ll effectively develop solutions.
What Key Metrics Should You Include In Your SBA Business Plan and Why?
Metrics or key performance indicators allow you to track your business’s performance and growth, essentially monitoring your enterprise’s progress toward its objectives. You’re also able to spot potential issues and address them before they’ve arisen depending on the goals you’ve set for your business.
Several revenue-related metrics that you should incorporate into your SBA business plan include the following;
Revenue-Related Metrics
Sales Revenue Metrics
Revenue is one of the most informative business metrics that evaluates company sales and gauges how your services or products perform in the marketplace. With these performance indices, you’re also in a position to discover the success of your business’s marketing efforts.
To calculate sales revenue, you’ll add the income from sales and subtract all costs associated with returned products or undeliverables services. As such;
Sales income – returned products = sales revenue
The importance of calculating sales revenue is to evaluate business health and its benefits including;
- Measuring profits: That helps to determine the profitability of your business since sales revenue accounts for product units or services you’ve sold.
- Assessing eligibility for loans or contracts: You’re required to provide specifics about your sales revenue when applying for SBA loans or government contracts.
- Resource delegation clarification: Your business can determine which products or services are the most profitable once you’ve calculated the individual sales revenue. It’s then easier to determine which units provide sufficient revenue and help with planning or updating your product or service offerings.
- Valuation determination: Your enterprise can use sales revenue calculations to determine valuation, which in turn indicates market growth and informs financial planning.
Customer Acquisition Cost Metrics
Your business acquires new customers through initiatives such as marketing and there are associated costs for these acquisitions. Customer acquisition costs or CAC gives you insights into the marketing strategies that work and those that cost more or have unequaled results.
Including customer acquisition cost metrics into your SBA business plan to show which marketing methods or lead generation strategies are successful. CAC is made up of advertising costs, sales and marketing team salaries, inventory upkeep along with technical, production, and publishing costs.
To calculate customer acquisition cost metrics, combine all the costs associated with gaining new customers, marketing, and advertising. Divide this by the number of customers your business has gained during a specified period as in the formula;
The total cost of marketing and advertising / Total number of customers gained = Customer Acquisition cost
Although the most significant use of CAC is to determine your enterprise’s profitability, you can also use it to compare CPA or cost per acquisition. That’s useful when deciding which leads were converted to paying customers and tells you how much you spent to attract each potential lead.
You can improve CAC with strategies that lower acquisition costs so that your business spends marketing finances more efficiently for improved profitability. That’s possible through;
- Defining the target market
- Performing split tests
- Increasing conversion rates
- Implementing marketing automation
Profitability-Related Metrics
Net Profit Margin Metrics
You can evaluate your business’s ability to generate profits against its overall revenue with the net profit margin metrics. It allows you to compare your income with the enterprise’s running costs and effectively predict growth, especially for the long term.
By including net profit margin metrics in your SBA business plan, you’re essentially providing a robust indicator of your business’s financial health. Lenders will evaluate your enterprise’s worth and effectiveness when deciding on financing eligibility. At the same time, you’re able to make decisions on overall spending, and operation costs and predict future profits.
Calculating net profit margin involves your business’s total revenues and total expenses and subtracting these figures. You’ll then divide the resulting net profit by total revenue and convert the decimal number into a percentage.
Gross Margin Metrics
Your business’s gross margin is the measurement in dollars of how much of each sale has gone into profits or other costs. It’s an essential metric that assists your business in paying off debts or reinvesting depending on how far your revenues are from their break-even point.
If you find that your business has a high gross margin, it means that you’re making a profit. SBA lenders or market analysts can use this metric to compare your financial health or profitability to your competitors.
One of the variables used to calculate gross margin is the cost of goods sold or COGS, which includes expenses for raw materials, production labor, and delivery. You’ll calculate this metric by dividing COGS from total revenues as a percentage, or as an equation;
(Total revenue – COGS)/Total revenue x 100 = Gross margin %
Liquidity-Related Metrics
Liquidity metrics or ratios help to determine your business’s creditworthiness and ability to pay off debt obligations within a safe margin. They determine your enterprise’s liquidity, which is the converting of assets into cash cheaply and quickly.
Higher liquidity ratios help analysts and SBA lenders determine that your business is more liquid and in a better standing to cover outstanding debts. Types of liquidity-related ratios or metrics include;
The Current Ratio
Your business’s ability to pay off its current liabilities is measured using the current ratio which takes into consideration your total assets like cash, inventories, and accounts receivables. This metric is calculated by dividing current assets over current liabilities or;
Current Liabilities/Current Assets = Current Ratio
The Quick Ratio
Your business’s ability to meet short-term obligations using its most liquid assets and excluding inventories is measured using the quick ratio. Also known as the acid test, this metric is calculated by adding cash and cash equivalents to marketable securities and accounts receivables then dividing the result by current liabilities.
Current liabilities (Current assets – inventory – prepaid expenses)= Quick ratio
Efficiency-Related Metrics
Efficiency ratios show how well your business manages and uses its assets, and they are an essential determination of its financial health. You’ll include these metrics in your SBA business plan as an indication of quick revenue generation using the acquired assets.
With areas such as sales management, inventory, and accounts receivables, crucial aspects of efficiency ratios to inculcate into your SBA business plan include;
Inventory Turnover Ratio
Your business’s ability to manage inventory effectively and provide insights into the enterprise is measured using the inventory turnover ratio. It calculates how many times you’ve sold your entire inventory over a specified period and determines whether enough sales have been generated.
You’ll calculate your business’s inventory ratio by dividing the Cost of Goods Sold or COGS by the average inventory.
Accounts Receivable Turnover ratio
A metric that measures your business’s ability to collect its debts actively and extend lines of credit is called the accounts receivable turnover ratio. It’s calculated by adding up your enterprise’s net credit sales and dividing them by your average accounts receivable.
Lenders and analysts determine your business’s favorability over its competitors by the level of accounts receivable turnover. A high metric will indicate that your business is effective in collecting debts and how efficiently it converts this into cash.
Conclusion
Your SBA business plan that’s armed with critical metrics will help potential lenders judge your enterprise’s financial health. These performance benchmarks are effective in determining efficiency, profitability, and revenue forecasts along with your propensity or ability to correctly use the proffered funding.
Such metrics are also measurements of your business’s ability to generate income and pay off your SBA lenders while helping keep track of its operations. Over time, these key ratios are also useful to compare your enterprise’s quality of operations and its competitive advantage against others in the same market segment.