10 Key Metrics Every Business Should Look Out For
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Just like you can’t drive a car blindfolded, you can’t do business without paying attention to the numbers. Otherwise, you’re doomed to crash — in both situations. How much revenue does your company earn? What’s your growth rate? How much you spend on developing your products and marketing them? These and more questions need to be answered so that you can effectively measure your financial performance, track achievements, control expenses, balance the failures, and prevent disasters.
In this post, we’ll review ten essential business metrics you should follow to succeed in what you do. Whether you are a startup or a solopreneur who has just created a business website, this information will help you evaluate your venture at a level that goes beyond tracking Google Analytics metrics.
1. Revenue growth
Gaining more revenue lies at the root of everything you do with your business. This is the ultimate goal you struggle to achieve. Revenue is the cumulative amount of money your business earns from sales (without excluding the production and sales costs), and it is the key metric that indicates your company’s overall financial performance.
When your business gets on its feet and expands, you will be able to compare this metric with that of your competitors’ to understand your position in the market. However, when you’re just starting your journey, it makes more sense to compete against yourself by evaluating how your revenue grows on a year-by-year basis.
Why? Because the context of your business may be very different from your competitors’, and if you start chasing after their figures, you may end up setting unattainable goals or wrong priorities. But keeping track of your yearly revenue growth will allow you to see whether you are heading in the right direction.
2. Average fixed costs
Revenue is impossible without prior investment. The expenditures your business faces consist roughly of fixed and variable costs. Fixed costs are those that do not depend on how many products you manufacture or sell. They always remain the same. These include your rent, utility bills, website hosting fee, equipment costs, insurance, etc.
To determine how much you spend to sustain your business activities, you need to calculate your average fixed costs. Simply add up all your fixed costs and divide the result by the total number of product units you have manufactured. Knowing your average fixed costs will not only allow you to control expenses more efficiently, but it will also enable you to assess the potential profits your business can generate more precisely.
3. Average variable costs
Unlike fixed costs, your variable costs are the expenses that depend on how many products you make and sell, and they change proportionally to your production volumes. The more items you produce, the higher variable costs you will have to endure.
Variable costs indicate how much investment is needed to manufacture your products. These include raw materials and labor costs, shipping, packaging, taxes, banking fees, sales commissions, etc. To find out how much it costs to produce and sell a single item, you need to calculate your average variable costs by dividing the total variable costs (the sum of unique variable costs of all your products) by the total number of product units produced.
4. Contribution margin ratio
When producing and selling your goods, you want to know which of your products are capable of generating more profits, without taking into account the fixed costs (because they are only required to sustain the operations rather than manufacture goods). That is why you need to know your products’ contribution margin ratio.
Simply put, the contribution margin ratio is the profit expressed in a percentage that you get from each product sold without excluding the fixed costs. In other words, it is the difference you get when subtracting a product’s total variable costs from the total revenue acquired after selling them. Thus, the formula for calculating the contribution margin ratio is as follows:
Contribution margin ratio = (Total sales revenue – Total variable costs) / Total sales revenue
5. Break-even point
The break-even point is one of the crucial business metrics that you have to track to determine how many products you need to sell to recover the production costs. Especially when you’re just starting your business, this is your primary objective. First, you need to offset expenses, and then you can aim at profits.
To calculate your business’ break-even point, divide your total fixed costs by your contribution margin (total sales revenue minus total variable costs). The figure you will get is the number of product items you’ll have to sell to compensate for the production costs. If you manage to sell more than that, you will turn a profit.
6. Cost of goods sold
The cost of goods sold (COGS) is the total amount spent on the manufacture and distribution of all the products the company has sold over a specific period. It includes the expenditures on materials, labor, natural resources, energy, fuel, etc.
The cost of goods sold is calculated by adding the total costs of your inventory at the start of the period to the total costs of all the new purchases made during a given time. Then subtract the total costs of your inventory at the end of the period.
Cost of goods sold = Total costs of inventory at the beginning + Total costs of new purchases – Total costs of inventory at the end
Knowing your cost of goods sold over a year, you can effectively plan your expenses for the year that follows. In addition, you need this metric to calculate your gross profit margin.
7. Gross profit margin
This business metric is extremely important as it allows you to see how effective your venture is in terms of generating pure profits. To calculate your gross profit, simply subtract your COGS from the total revenue over a given period. In that way, you will get an absolute figure in dollars (or other currency you’re using). This is the profit your business makes. However, if you want to know your gross profit margin, which is the relative figure expressed in a percentage, you also need to divide the result by the total revenue.
Gross profit margin = (Total revenue – Cost of goods sold) / Total revenue
8. Customer acquisition cost
Your business is not just about production. If you want to sell more of your products or services, you need to market them. Customer acquisition cost (CAC) is a business metric that shows the effectiveness of your marketing efforts. It basically indicates how much you spend to get one customer.
CAC is calculated by dividing your total marketing and sales costs by the actual number of customers you have acquired over a specific period. The figure may vary greatly for different businesses and different industries. Furthermore, it depends on public awareness about your product. So, if you have just launched a new product, expect your CAC to be higher at the early stages of promotion.
9. Return on advertising spending
Advertising is an investment, and calculating its ROI can give you an idea of whether your advertising money translates into revenues. The formula is quite simple: divide your total sales by your advertising costs. Thus, if you invested $20,000 in advertising and earned $60,000, each dollar invested in advertising has brought you $3 in return. By calculating the figure for each of your advertising channels, you can identify which one works best for you.
10. Customer retention rate
Depending on how good your products are and how effective your marketing is, your customers will either stay with you or leave. This is especially true for subscription-based business models (for example, if you are a software developer). You can calculate your customer retention rate by using the following formula:
Customer retention rate = (Total number of customers at the end of the period – Total number of new customers over this period) / Total number of customers at the beginning of the period
Knowing your retention rate allows you to evaluate how your business is doing in general. If your customers are leaving you too soon, you’re probably doing something wrong.
Know your metrics!
Keeping track of your business metrics may be a chore, but it is an integral part of your company’s operations. It allows you to monitor your performance and enables you to set the right KPIs for your business in order to grow more efficiently. Some calculations may seem a bit confusing at first glance, but once you get into them and practice them a couple of times, identifying your performance indicators will no longer be an issue.
