10 Crucial Questions for a Business Owner

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Entrepreneurs and small-business owners make a choice to forge their own path rather than working for someone else. Their reasons vary, from taking over a family business to seizing a short-term opportunity. Very often, they do so without the benefit of a formal business education. That’s where the following top 10 business-related questions come in.

This article explores 10 business questions to ask regularly, why each matters, and how to think about your answers. Together, this provides a strong framework to help business owners clarify their business strategy, improve their finances and make their businesses bigger, better, and stronger – for the long term.

Here are the 10 crucial questions for small-business owners:

1. What problem does your business solve?
2. How does your business generate income?
3. Which parts of your business are not profitable?
4. Is your cash flow positive each month?
5. What is your pricing strategy and why?
6. How effectively do employees generate revenue?
7. What is your customer retention rate?
8. Will your customers make referrals?
9. Who are your most valuable – and most costly – customers?
10. Is your social media strategy effective?

1. What Problem Does Your Business Solve?

Every business’ success is closely tied to how well its products or services fulfill customers’ needs or solve their problems. Great companies stay great by filling a void for customers and then evolving as that customer need changes. That’s why this is the top question business owners can ask themselves. Clearly understanding why customers buy your product or service and, further, why they choose it over competitors’ products (or substitutes) is an important first step in building a business and its brand.

How to answer this question: Nail down the benefits and outcomes of your product or service before you even start selling it. Practice explaining your business idea to people you trust, like advisors, mentors, family, and friends. Develop an elevator pitch that describes the business’s purpose in less than two minutes – roughly the time it takes for an elevator ride. The more succinct and easier to understand, the better. If your product is already in the market, listen to your customers. Solicit direct feedback from customers about what they like, what they dislike, and why they choose your brand. Doing so not only improves customer relations, but also provides valuable insights that can help you overcome a variety of business challenges. 

2. How Does Your Business Generate Net Income?

Businesses need net income (aka profit) to be self-sustaining, fund growth, and enrich their owners. Without consistent income, businesses can become insolvent and eventually fail. It’s crucial to understand the intricacies and interdependencies of your business model and how it generates income. For instance, does income accumulate, bit by bit, from high sales volume? Or does premium pricing produce good income from fewer sales? Are certain sales channels more effective than others? By analyzing how the business generates income, you can identify where to focus resources and where to potentially cut back in order to optimize profit.

How to answer this question: Prioritize meticulous recordkeeping, accounting, and timely financial reporting. Regularly review your monthly income statement (also called the profit and loss statement, or P&L), which shows sales and expenses. Compare actual results with business plans and budgets, identifying and researching the reasons behind any variances you find. Select and monitor key performance indictors (KPIs) that measure the variables that are critical to your business model. Examples include gross margin, inventory turnover, product returns, and the percent of sales that comes from top customer. This helps you stay up to date on the factors that drive profitability, spot trends and make better-informed business decisions.

3. Which Parts of Your Business Are Not Profitable?

Understanding which individual products and services are more (or less) profitable than others helps guide various business questions, such as which products to promote, which are essential cash cows to retain, and which might need price or cost adjustments. While some less profitable offerings may be worth keeping, it’s crucial to manage the overall product mix and be mindful of the ones that are losing money. For example, a retailer may intentionally promote “doorbuster deals” for low profit back-to-school supplies, hoping to also drive sales of high-margin clothing.

Great companies stay great by filling a void for customers and then evolving as that customer need changes. 

How to answer this question: Use accounting systems that can break down your monthly P&L by product. Compare actual results to budgets, prior periods, and industry benchmarks. Also, pay close attention to trends, forecasts, and customer feedback. Identify the high performers, products that require adjustment, and poor performers. This data can help you make decisions that strengthen profitability and optimize resources.

4. Is Your Cash Flow Positive Each Month?

Do we have enough cash to pay our current bills? That may be the fundamental business-related question you can ask. Cash-flow management, which involves closely monitoring the timing of cash inflows and outflows, is particularly vital for small businesses because cash-flow challenges can be a common cause of small-business failures. Positive cash flow means your cash inflows (such as from sales) exceed cash outflows (such as expenses), which positions the business to meet its financial obligations, like paying suppliers and employees. Negative cash flow means cash is leaving the company faster than it’s coming in.

How to answer this question: Regularly review cash-flow statements to help monitor the business’s cash flow and assess available cash for upcoming needs. These statements can be generated at least monthly, and maybe more frequently, depending on the needs of the business. Cash-flow forecasts, which estimate cash flow for future periods, can be vital to help business owners plan ahead for cash crunches and surpluses. If there's an area of the business that’s generating consistently negative cash flow, you may want to examine it more closely.

5. What Is Your Pricing Strategy and Why?

Setting prices for your product or service is part marketing and part finance. Pricing is another fundamental business question to ask because it can directly affect brand perception, competitiveness, customer behavior, and profitability. Prices should generally align with product positioning, usually either premium or value-based, and make sense within the competitive set and your customers’ expectations. At the same time, pricing must cover your costs and yield the required profit. While cost-plus pricing is a common strategy, other approaches, such as value-based pricing, competitive pricing, or dynamic pricing, might be more appropriate for your business.

How to answer this question: Put processes in place to monitor both your pricing and that of your competitors. Regularly analyze your P&L at the product level to monitor how the costs of materials and labor have changed over time, and the impact on gross margin. Stay informed about market conditions, such as changing customer preferences, competitor activity and economic trends. Gather feedback from customers or through your sales team to understand their perception of your pricing and identify potential areas for adjustment. Also, you may want to consider periodically testing to see how price changes impact sales volume and customer behavior.

6. How Effectively Do Employees Generate Revenue?

Having the right number of employees with the right mix of talent can be one of the thorniest and most costly aspects of running a small business. Optimizing labor costs requires every employee to contribute to the company’s bottom line and provide real business value. If this isn’t the case, it’s important to figure out why and make changes. You might consider ways to improve your work culture to boost productivity, improve training, and recruit better candidates to join your team.

How to answer this question: Apply return on investment (ROI) measures to your team. Track KPIs, such as revenue per employee, sales goals, and labor costs as a percentage of sales to objectively measure how efficiently the team generates revenue. Communicate these measures to employees and commit to regular performance reviews to track individual progress. Review existing incentive plans, such as bonuses and commissions, to ensure they are aligned with business goals, and consider adding new ones so that the entire team has a stake in driving sales. Employees are more than numbers, so you'll want to complete this process thoughtfully before making any drastic decisions.

7. What Is Your Customer Retention Rate?

Long-term, repeat customers can be an important source of revenue and stability, and so play a key role in business success. Plus, loyal customers can be a valuable source of insight into how well your product or service is fulfilling its mission, as well as competitive intelligence. Conversely, losing customers can be a sign that a part of the business needs improvement, such as poor customer service or a disappointing product. Since it costs from five to 25 times more to acquire a new customer than to retain an existing one, depending on the business and its industry, some businesses prioritize customer retention programs. Retention programs typically include loyalty rewards, repeat customer discounts, enhanced customer service, and other perks.

How to answer this question: Regularly calculate your customer retention rate (CRR) along with other supporting KPIs. Monitor whether your CRR is rising or falling, and compare it to industry benchmarks. It can also be beneficial to set goals for increasing CRR, as improving retention by even a small percentage can have a large positive impact on profit.

CRR is calculated as:

CRR = ((E-N)/B) *100

where:

E = number of customers at the end of the period being measured

N = number of new customers acquired during the period

B = number of customers at the start of the period

To illustrate, consider a services business with 1,000 customers at the beginning of its first fiscal quarter. During the quarter, it acquired 57 new customers. It ended the quarter with 1,007 customers. The calculation would be ((1,007 – 57)/1000 * 100, which works out to a CRR of 95% for the quarter.

Other related KPIs include: 

• Customer attrition rate: the number of customers lost over a specific period
• Repeat customer rate: the percentage of customers that make more than one purchase
• Purchase frequency: the average number of orders per customer
• Revenue retention rate: similar to CRR, but measures the revenue from repeat customers rather than the number of customers

8. Do Your Customers Make Referrals?

Customer referrals can be a highly effective way to attract new customers. When customers have a great experience, they may be inclined to recommend your business to others. Referrals are also a highly efficient way to grow your business because referred customers need less marketing effort, leading to a lower cost of acquisition. But that doesn’t mean your business will earn referrals without any investment. For instance, cultivating relationships with customers through excellent customer service increases the likelihood of referrals. Formal referral programs can also be a great way to reward and incentivize loyal customers to make referrals.

How to answer this question: Develop a referral strategy and treat referrals as another marketing channel, with appropriate budget and accountability. An initial step is to simply ask your customers for referrals and publicly acknowledge those who do, such as featuring them on your website. Implement a structured referral program and promote the rules and rewards. Ensure you have a way to keep track of all customers acquired through referrals and measure their lifetime spending.

9. Who Are Your Most Valuable – and Most Costly – Customers?

Just because a customer adds to your top line doesn’t mean they’re helping your bottom line. The Pareto Principle is a concept that suggests that roughly 20% of your customers yield 80% of your profits. Identifying the most and least profitable customers can help businesses allocate appropriate resources to serving them. Costly customers might include those who stock up only on sale items or discounted goods, don’t pay their bills on time, or simply drain resources by requiring excessive attention or assistance. Business can benefit, and even grow, by having fewer but more profitable customers.

How to answer this question: Segment your customer base by reviewing gross profit by customer. This means identifying sales from each customer and all the costs involved in serving them, such as acquisition cost, discounts, extra labor, or nonstandard fulfillment. Ask employees to help evaluate which customers require the most resources. With that data, establish a company standard for cost-to-serve and identify the outliers who overburden business resources. Calculate customer lifetime value, using the more advanced formula that includes costs, to determine the amount of profit you can expect to generate from a customer over the time they are a customer. These KPIs can help you get a sense of the most profitable customers.

10. Is Your Social Media Strategy Effective?

Social media can be a key part of any small business’s marketing plan because it can help expand reach and visibility at a relatively low cost. A strong social media strategy with engaging content can help build brand awareness, generate leads, and grow the business. An effective strategy starts by defining social marketing efforts that align closely with your business’s goals and brand. This means developing a plan that outlines the kind of customer prospects you are targeting, what you want to say to them, how you will build relationships with them, and ultimately, what actions you want them to take.

How to answer this question: To determine your strategy's effectiveness, identify goals, set budgets, and measure results for your social media strategy. For instance, is the goal to drive sign-ups, increase purchases, or get customer feedback? Decide whether to hire a digital marketing specialist or share the tasks among current staff. Either way, it’s important to impose accountability and measure results. For example, are you achieving your target conversion rate? And at what cost? Using the analytics tools available on the various social media platforms can help you evaluate results and make changes as appropriate. Since engagement is crucial, encourage follows, comments, and shares so that the social media algorithms boost your posts. Finally, stay current with trends by using social listening tools to determine what’s driving website traffic and engagement among your target audience.

From Business Questions to Entrepreneurial Characteristics

Owners who aren’t constantly reevaluating these 10 crucial business questions risk missing opportunities for positive change and growth. To help maximize business success, revisit them regularly and apply an entrepreneurial mindset to your answers in order to identify the best actions to take as a result.

A version of this article was originally published on October 13, 2011.

Photo: Getty Images

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