Starting your own business has a lot of appeal. In fact, 24 million Americans say they want to be self-employed within the next two years, according to FreshBooks’ 2019 Self-Employment in America Report. While the idea is exciting, there’s risk involved. Statistics show that the rate of failure is high, with one in every two businesses closing their doors within the first two years.
Why do new businesses fail? Owners don’t keep a pulse on their performance. The early years of launching a business are the most challenging – and most critical – for survival. People can get caught up in the day-to-day obligations and forget about reviewing their progress. But self-employed professionals who are able to gauge the health of their enterprise have a much better chance of overcoming the odds of success.
Here are five numbers you can count on to monitor your business:
1. Spend 20% of Your Time Prospecting
Small business owners wrestle with competing priorities to deliver work and find new clients and projects. But you need to find a balance between running and growing your business. In other words, you need to give yourself time to work “on” your business, rather than always working “in” it. If you’re not spending 20% of your time searching for prospective clients through marketing and sales, you won’t grow your customer base or increase revenue.
FreshBooks surveyed more than 1,700 self-employed professionals and found that about 40% of business owners say they put 10% of their time or less into sales and prospecting. What’s more, over 50% say they are too busy getting work done and neglect making the time to sell.
2. 30% of Clients Should be Repeat Clients
You want your customer retention to be high because it’s much easier to sell more of your services and products to an existing customer who already knows and values what you have to offer. Repeat clients also create income stability and often lead to solid referrals.
The number of recurring clients is a clear signal that your business is meeting their needs. Having a rate lower than 30%, however, suggests high client turnover and possible dissatisfaction. So if you are in this category, you should be asking “why?”
3. 70% of Your Projects Should be Profitable
You’re in business to make a good living, and that means managing your time and dollars to keep you in the black. Here’s the thing: four in 10 businesses are profitable, three break even, and three lose money.
Whether you track profitability per project or time spent, you want to make sure at least 70% of your endeavors are profitable. Sometimes, you’ll break even or be in the red, but you want to make sufficient funds to cover the costs of running your business and continuing to grow it.
4. 30% of Your Earnings Should be Saved for Taxes
Tax preparation is probably not the most exciting part of being self-employed. But the last thing you want is to incur penalties or interest because you don’t have the funds to pay the income tax you owe.
The good news is tax is something that you can manage on an ongoing basis. A reliable guideline is setting aside 30% of your income for the government throughout the year. This will help avoid any negative outcomes, plus you can budget for business growth.
5. 15-Day Timeline to Date of Pay
Net 15 is a standard credit term for small and medium-sized businesses to use for invoicing clients. You send the products or perform a service first and then you request payment upon receipt of your invoice.
Payment terms are important to include on an invoice because they make it clear exactly when you want to be paid and prevent any confusion that can result in late payments. They also increase your chances of being paid on time, Entrepreneur reports, which impacts your cash flow and financial position to expand your business activities. Including the term “due now” will signal to clients that you expect prompt payment. This will help put you on track to hit the 15-day benchmark.
Many people feel that invoicing is a necessary hassle, but it doesn’t have to be. Cloud accounting programs can automate most of the invoicing process, send periodic reminders, and allow for easy online payment.
A lot of numbers come up when you are starting a business, but if you keep these five numbers in mind as you go along, you will be in a better place to chart the health of your business and make critical adjustments as needed.
Matt Baker is a contributing writer who covers finances and growth for small businesses. His industry experience includes SVP Corporate Strategy and International Expansion at FreshBooks, engagement manager at McKinsey & Company, and senior strategist at Google, Inc. He also wrote a children’s book.