While every business is different, there are several business performance metrics that all businesses should track regularly. Using these metrics can help you:
- Identify strengths and leverage opportunities
- Find challenges and plan accordingly
- Build customer loyalty
- Stay ahead of your competition
In this overview, we look at several key metrics that can help you assess how you’re doing and find ways to improve how you do business.
Understanding performance metrics: The basics
Simply stated, “performance metrics” are measurements that you can use to figure out if your business is operating efficiently and effectively.
To be effective, it’s also important that:
- you can calculate the measurements easily or that they’re readily available through your bookkeeping software’s reporting functions or your inventory-management system
- you use current data to ensure that your measurements are accurate today and provide honest and useful data down the line
- there’s a direct correlation between the metrics, the improvements that you can apply and your business’s bottom line
Key performance metrics for businesses
There are several key metrics that you can use. Depending on which stage your business is in and your comfort level with business-management tools, you can choose one metric to focus on, or several.
Whichever you choose, make sure that you tailor them specifically to your business. That means keeping your overarching business goal in mind and ensuring that your metrics help you achieve it, whether you want to increase customer retention or learn to better manage cash flow throughout the year.
Key metric: Cash-flow forecast
Simply, cash flow is what’s left after you pay all of your business’s normal daily expenses.
- If your business has been in operation for a year or more, then you’ll have performance data available that can help you in many ways. For example, you can identify seasonal or other business cycles, when cash flow may increase or be pinched. Knowing this in advance, you can plan for potential loans or lines of credit to keep your business financially stable and strong during tight times.
Your cash-flow forecast also helps you and your accountant develop tax-wise strategies for growth, like determining the best time to invest in new equipment, add more staff or expand with another location.
- If your business is a startup, you’ll want to pay close attention to your forecasted cash flow and note any circumstances that impact it as you build real data. Every detail can help you get closer to better forecasts in the years ahead.
Key metric: Gross profit margin as a percentage of sales
Gross profit margin, often expressed as a percentage of sales, is the amount of money a company has left over after the cost of goods sold (COGS) has been deducted. This is important, because it helps you quantify how much money your business keeps, versus how much you’re paying for operational expenses to run the company’s day-to- day activities (the expenses not directly associated with production).
While this is commonly used in businesses that sell tangible goods, including retail, restaurant and wholesaling businesses, this can be adapted for service-based businesses, too.
Key metric: Revenue growth rate
Revenue growth rate is a simple measure that shows the rate at which your business’s sales (or revenues) are increasing, decreasing or plateauing and is a basic measure of business performance.
Tracking this continuously helps you identify challenges that may cause your income to flatline or decrease (or, at the very least, it should prompt you to look for the causes) before these challenges get too big to address. And if sales are increasing steadily, this can indicate that it’s time to invest in growth.
Key metric: Inventory turnover
Inventory turnover measures the number of units sold in a given period and shows how effective your business is at moving goods. The goal is to turn over goods at a high rate without significantly lowering prices.
When your business’s inventory turnover is strong, it shows that your offerings are attractive to your target demographic and that you’re reaching them effectively. If turnover is slow, or you can only move goods at high rates by deeply discounting your products, this metric shows important business challenges that need to be addressed, such as:
- you’re stocking the wrong items for your target demographic
- you’re not reaching your target demographic
- you’re facing competition that you’re not aware of or effectively overcoming
Key metric: Relative market share
Relative market share shows how much of a given market your business controls. For example, you may be the second-largest supplier of goods in your industry or the largest ice cream stand in your town.
This is an overall indicator of how your business is performing in comparison to your competitors and can help you identify adjustments that can improve your business’s standing. It’s an important indicator because even if your revenue is increasing steadily, if your business’s relative market share is falling over time, it can be an early indicator that your competition is creating more challenges than you realize.
Key metric: Net burn rate
This shows how quickly your business loses money and how long you can go before your business runs out of money. And while that sounds alarming, if you understand it, it can give valuable insight.
Here’s why: For startup and early-stage businesses, it’s typical to spend more money than you generate, at least for a while. That’s because of all the expenses associated with opening and operating a business before you’ve secured enough customers to generate a profit. And for existing businesses, there will also be times when expenses will exceed income, such as during off-seasons for seasonal businesses.
When you have a realistic sense of these circumstances, you can effectively plan for them, through loans and lines of credit, or identify ways to reduce expenses or increase revenues during those times.
When your net burn rate is unanticipated, higher than expected and ongoing, though, that’s when you have more serious issues that must be addressed.
Key metric: Retention/churn rate
Your retention rate is the percentage of customers that stay with you over a given time. Your goal is to keep as many as possible, because it’s more expensive to gain new customers than it is to keep existing customers.
Likewise, your churn rate is the percentage of customers you lose over time. While some churn is inevitable, knowing why you’re losing them can help you understand if solutions can be created to strengthen loyalty and help you keep them.
Key metric: Cost of customer acquisition
This is the total of the expenses involved in acquiring your customers, divided by the total number of customers gained, in a particular period. This can help you understand how effective your marketing and advertising are, as well as how far you should go to keep your customers.
If, for example, you spend $100 and gain 10 new customers, then it costs you $10 for every customer you gain. If you spend $5,000 to gain 10 customers, then it costs you $500 for every new customer.
Once you have this figure, you can determine if your cost of customer acquisition makes sense for your business.
If it costs $10 to gain a customer who will likely only spend $5 (and the chances of repeat business are low), then you may need to reconsider your marketing and advertising approach (or your business model, offerings, pricing strategy or target demographics).
If, however, it costs you $500 to gain a customer who will spend $5,000 with you, it’s a worthwhile investment.
Drive growth and plan for success with key performance metrics
Performance metrics are a great tool to help drive success. Focus on a few that are most important to your business goals for the next year and, as you gain experience and your business grows, you can integrate more, as needed.
And if you have questions about these metrics or would like additional insight and guidance, give us a call. Every day, we help entrepreneurs strengthen and grow their businesses, with useful and relevant guidance, workshops, mentoring, loans and more.
