“If you can’t measure it, you can’t improve it.” (Peter Drucker)
Metrics allow businesses to track the growth and performance of various aspects of the business, enabling owners and managers to monitor a company’s progress toward its goals, identify and manage proactively potential problems, and make well-informed intelligent decisions.
Many business metrics can be tracked by a company, and those selected will ultimately depend on your business’s unique goals. However, 9 key metrics should be tracked on a regular and ongoing basis by every business that aims to increase profits and maximise growth.
In this article, we find out what these 9 key metrics are, how they are measured, what they tell you about the business, and how they might be improved.
Metrics are defined as a set of numbers that give information about a particular process or activity. In a business context, a metric is a quantifiable measure used to track, monitor and assess the performance of various business processes.
Also known as key performance indicators or KPIs, business metrics allow you to track the growth and performance of a business, so potential problems can be identified and effective solutions developed, and well-informed decisions can be made.
There is a range of metrics that a business can track in terms of sales, financial results, human resources, customers and work progress. In the complex world of business today, using just one or two metrics will not provide a complete overview of the business performance. For example, focussing only on the sales revenue metric may create the impression that the company’s performance is on target, when adding the net profit and gross margin metrics will reveal a more accurate picture.
To truly gauge your business’s performance, you need to measure your growth in a multitude of ways, tracking the relevant metrics together for a big-picture understanding of performance across the various functions.
The 9 key metrics
The selection for your specific business should be based on your own business’s unique goals. However, where the aim is to increase profits and maximise growth, 9 key metrics will enable you to track, monitor and assess the performance of various business processes.
- Sales revenue and growth – Sales revenue or income is the key metric every business uses to measure its financial performance. It is measured by adding up the income from sales, less any costs associated with returned products and/or refunds. A further, related metric that is more indicative of your business’s financial performance is year-on-year revenue growth. These metrics allow businesses to evaluate the company’s sales, how the products or services are performing in the marketplace, and how successful the business’s marketing efforts are, compared to previous years. Sales income can be increased through price increases, or through boosting sales by finding new customers or selling more to existing customers.
- Net profit margin – The next crucial metric every business should track is the net profit margin. This metric determines how much profit was made by deducting all the expenses incurred from the income generated, including the cost of goods sold, interest, taxes and operating expenses. The net profit margin compares the income generated to the costs associated with generating that revenue, effectively evaluating the company’s ability to deliver a profit. As such, the net profit margin can predict a business’s sustainability and potential for long-term growth. The net profit margin can be increased by increasing income and / or lowering the costs of generating that revenue.
- Leads and lead conversion rates – Increasing income requires more sales, which means finding new clients, and this requires access to new business leads, as well as the ability to turn those leads into customers. This metric helps businesses establish how many new leads it gets, and from where, and how many of these leads become new customers. Lead conversion rates can be calculated by dividing the number of new leads per month by the number of new customers per month. This metric can be increased by, for example, extending marketing and advertising efforts to generate more leads, or by investing in factors known to increase lead conversions such as quality products and services, professional salespeople and processes, and excellent customer service.
- Gross margin – A company’s gross margin measures the percentage of income that goes toward costs of producing your goods and services, but excluding other operating expenses, interest and taxes. It is calculated by subtracting the cost of goods from the total sales revenue and then dividing that by the total sales revenue (multiply that result by 100 to get gross margin as a percentage). Other metrics in this regard include average fixed costs per month or unit of production, as well as average variable costs per unit of production, which depend on the number of sales, such as sales commissions and raw materials. To calculate your average variable cost, add all total variable costs of the product or service together and divide by the total number of units delivered. This metric reflects the efficiency of the business processes and basically states overall productivity in numbers. This number can be increased by improving the efficiency of processes and productivity, thus reducing costs which will improve cash flow.
- Cash flow – Cash flow is a key metric, particularly for smaller businesses where cash is crucial. It is measured through carefully managing accounts receivable and accounts payable, as well as tracking and forecasting your operating cash flow based on the sales revenue and gross margin metrics. Essentially, this metric shows which areas of the business are generating and using the most cash; reveals how readily a company can meet its debt and interest payments; enables informed budgeting and spending decisions; and allows potential cash flow problems to be identified and managed in time. Tracking and forecasting your cash flow allows the business to manage this crucial aspect better, while using credit lines responsibly can help during inevitable pinch periods.
- Customer acquisition cost and lifetime value – Acquiring new customers involves various costs, such as advertising or marketing, as well as the time and administrative costs of onboarding a new customer. However, these costs must be evaluated in terms of the lifetime value of a customer. Customer acquisition costs are calculated by dividing the costs of acquiring and onboarding during a specific period by the number of clients acquired during that same time. This metric is even more insightful when compared to the lifetime value of the average customer, which reveals how much revenue the business can expect to earn from a typical customer. It can be calculated by multiplying the value for an average sale by the retention time for a typical customer and the number of transactions a typical customer usually generates in that time frame. This metric highlights what is affordable in terms of acquisition costs per customer and can help distinguish higher-profit customers from those who are too expensive or difficult to convert. One of the ways in which to improve this metric is to focus on customer satisfaction and retention.
- Customer satisfaction and retention – This metric reveals how satisfied your customers are and thus how likely you are to retain their business. Satisfied customers are easily retained over the long term, make repeat purchases, and tell others about your business, generating both leads and conversions. It can be measured through customer satisfaction surveys, or even by simply making regular calls to your top customers. This metric can be vastly improved with a focus on quality services and/or products, and excellent customer service relationships, and this is in great part achieved through satisfied and loyal employees.
- Employee satisfaction – This metric measures how satisfied your employees are at your company. It can be measured through feedback and surveys. By regularly measuring employee satisfaction, you can address any issues timeously. This metric can be greatly improved by treating employees fairly and creating a positive company culture they feel proud to belong to. Employees determine the overall success of the business because satisfied employees are more productive and will enhance your progress towards the achievement of the business’s goals. Top managers need to be accessible to employees at all levels and encourage open and safe communication. Opportunities and problems with customers need to be communicated immediately to enable positive responses and action.
- Progress toward goals and deadlines – This metric provides insight into the company’s capacity for production and its performance in this respect, and flags potential issues. Performance measurements and performance accountability are key. Every business has goals and deadlines, which are achieved in milestones. This means you can track progress through the number of milestones that are met, on target and/or overdue. The company’s overall efficiency in meeting the milestones and deadlines can be improved by developing effective solutions to identified issues such as unrealistic expectations, insufficient resources and low productivity.
Tracking all these business metrics may seem challenging and time-consuming, but for improved profitability and business growth, it is crucial to do so. Your accountant will be able to assist you in tracking many of the metrics discussed and provide advice in respect of tracking non-financial metrics, allowing you to monitor and assess the performance of the most crucial business processes and to make informed business decisions.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.