Most freelancers don’t consider themselves small business owners, but they are. It’s time to start treating your business as one by tracking and measuring a few metrics for your small business.
Instead of diving into full-on metrics and analytics, you can use a few key performance indicators (KPIs) to measure and improve your writing business without getting overwhelmed with details and data.
Why You Need KPIs for Your Writing Business
Large companies use KPIs and metrics to determine the health of their business, and you can do the same. They can keep you on track, give you ideas of where to improve, and show if your efforts are paying off.
5 KPIs to Track for Your Writing Business
Not sure what KPIs you should track? Here are five basic ones that’ll help you understand your business, see how it’s growing (or not), and tell you when you need to do more marketing or increase your rates.
1. Net Profit
This KPI will tell you whether your writing business is getting more or less profitable every year. While it would be nice if your net profit goes up every year, there’s a chance it won’t. Keeping an eye on it will help you understand where you’re at and give you concrete numbers when external forces impact it. For instance, when there’s an economic downturn, or you’ve made a significant investment in your business.
To calculate it, subtract your expenses from your revenues.
2. Net Profit Margin
Slightly different from the previous KPI, your net profit margin shows you how well you’re using your revenue. Said another way, it’s a measure of how much profit your business makes from the revenue it earns.
To calculate it, divide your net profit by your revenue.
For example, if your business earned $100,000 in revenue, and your net profit was $50,000, your net profit margin is 50%. For every $1 you earn, your writing business keeps $0.50.
3. Customer Acquisition Cost
Subscription-based businesses are diligent about calculating this number for their business as they want to know how much it costs to acquire new customers over time. They typically use it to help them price their products and services.
When you start your B2B writing business, you don’t have to worry about it as much since you’re just starting. As you grow, however, this is an essential metric to track. Mainly because you’re a sole business owner and have to do everything for your business (marketing, administration, accounts payable, etc.).
Your Customer Acquisition Costs (CAC) can help you decide whether to keep working in a niche or market, whether to pivot to a different business type, or whether to increase your fees.
To calculate your CAC, divide your marketing costs by the number of new customers you get. For example, if you spent $2,000 on marketing and got 10 new clients, your CAC is $200 per client.
4. Customer Lifetime Value
Knowing how much your customers are worth can help you decide how much to spend on sales and marketing. Think of the Customer Lifetime Value (CLV) as a gauge of the profit associated with your customers, which should guide how much you invest to maintain the relationship.
Once you calculate your CLV (income), compare it to the CAC (expense): it should be higher than your CAC for that customer. Otherwise, it’s not worth your time and effort to maintain.
There are two ways to calculate your CLV:
- For mostly retainer customers, multiply the average retainer price by the average number of months clients work with you (e.g., $800 x 10 months = $8,000 CLV).
- For mainly project-based work, you’ll need to do a bit more homework and math. Calculate the average number of projects you do for clients and multiply it by the average cost of each project you do. For example, the average project price = $1,000 and average number of projects = 10 gives you a CLV of $10,000.
5. Quick Ratio
As a freelance writer, you might forget you’re also a small business owner (I know I do). Cash flow is vital to small businesses, and you must monitor it regularly. The quick ratio KPI can help you quickly see whether your cash reserves and future invoices are enough to cover your liabilities.
To calculate your quick ratio, add your cash, savings, and accounts receivable (invoices that have been sent but not paid), and divide that by your current liabilities.
For example, if you’ve got $2,500 in cash, $5,000 in accounts receivable, and $10,000 in liabilities, your calculation is ($2,500 + $5,000) divided by $10,000 = 0.75.
A quick ratio over 1 means you have enough cash and assets to cover your outstanding bills. A quick ratio of less than one means you cannot cover your current liabilities, so you should increase your marketing or fees.
How to Track These KPIs
KPIs and metrics are no good if you’re not tracking them. We’ve gone over some simple ways of calculating them, but if you’re using invoicing or account software, you can probably calculate these (and others) automatically.
Here are a few of the more popular software applications and how you can find some of the metrics we talked about:
- FreshBooks: Use the Profit & Loss Report to see your net profit quickly.
- Wave Accounting: Use the Cash Flow statement to track your quick ratio.
- QuickBooks: Use the Sales by Customer Summary to start your CLV calculations.
It’s easy to get confused by all the KPIs and numbers out there you can be measuring for your writing business. That’s why we selected these five to focus on. They’re not too hard to calculate and track, even if you’re doing it all manually.
Become more familiar with them, and you’ll make better decisions about your business and help it grow more efficiently without getting bogged down in complexities and graphs.