For a company to be successful, it needs constant monitoring. You need to set up and measure key metrics and data to track your company’s growth.
This article will explore how to measure your business success through (7) key metrics.
Why Are Metrics Important?
Metrics, also known as KPIs (key performance indicators), allow you to track the growth and performance of your business.
This information is vital because it allows you to monitor the company’s progress toward its goals and spot and address challenges as (or before) they arise.
Get Clear On What You Want
It’s no secret that 50% of small businesses fail in the first five years of business. One of the biggest reasons new businesses fail at such an alarming rate is because they do not track their numbers.
The first step to monitoring the success of your business is to make sure you have established clear goals.
Your goals must be specific and measurable.
My/Our goal is to generate $1M in gross revenue by (date).
My/Our goal is to generate 35% profit from the $1M in gross revenue resulting in $350K net profit.
You get the point.
Once you have defined your goals, you have clarity on the specific targets you are trying to accomplish. Next, you need to determine the metrics you’ll need to track.
(7) Key KPI’s To Measure in Business
It’s important to note that the business metrics you choose to measure and track will depend on your specific goals. You cannot make the best decisions for your business unless you have measured and tracked your objectives.
And if you’ve never heard of KPIs before KPIs are Key Performance Indicators. Essentially, they are the goals/objectives that you set that can be tracked and measured.
That being said, there are (7) basic metrics that most businesses will track to measure business success, they are:
- Sales Revenue
- Operating Expenses
- Profit Margin
- Cash Flow
- Client Retention
- Cost of Acquiring New Clients
- YOU (Your energy, capacity to take more on, time, learning versus doing)
Let’s drill down on each area below.
1. Sales Revenue
Sales revenue is likely the most monitored in business. Determining your organization’s sales revenue is simple. Add up the total sales income minus any undelivered, returned, or refunded products/services.
2. Operating Expenses
Next, you need to monitor your operating expenses. Operating expenses are the expenses that a business incurs to keep it running.
Here’s a list of the most common expenses for small businesses:
- Utilities (such as heat, lights, water, phone, internet, etc.)
- Marketing (including marketing research, promotions, public relations, web hosting, advertising costs, etc.)
- Legal Fees
- Office Supplies
- Software and Technology (such as Zoom, Eventbrite, CRM Software, etc.)
- Maintenance and Repairs
- Travel expenses (such as miles, flights, hotels, Uber/Lift/Cab, etc.)
3. Profit Margins
Profit margin is the ratio of profit remaining from sales after all expenses have been paid.
To calculate your profit margins, use this formula:
(Total Gross Revenue – Total Expenses) Divided by Total Revenue
Profit Margins are shown as a percentage.
Other names for profit margin are profit margin ratio, gross profit ratio, and sales ratio.
Your profit margin shows how well the company is managing its overall finances.
Investors and creditors often use a profit margin ratio to determine a company’s ability to convert sales into net income. This is important because creditors are interested in knowing if the company makes enough money to repay its loans and financial obligations.
Did you know you can make a profit in your business without having any cash to pay the bills? Profit does not equal cash in a business.
4. Cash Flow
Your cash flow statement is your income statement and your balance sheet put together. These sheets tell your expenses, where you spend money, where your money is coming from, and any supplemental information.
You don’t have to know all of this to run a profitable business, but your bookkeeper or accountant needs all the information from you and can help you understand the numbers enough to make your next step.
If you are waiting until the end of each year when you do your taxes to figure this information out, you are doing yourself and your business a disservice.
Not paying attention can create a poor cash flow challenge where you are profitable in business, but you cannot pay your bills. And that is not an excellent way to stay in business long term.
- Have you added up how much you are spending each month?
- Are you using all the resources you are paying for?
- Do you have to buy inventory, or are you strictly service-based?
- Where do you collect money? Make a list of your current clients.
- How often are you getting paid for your services?
- Do you have access to cash?
5. Client Retention
Did you know that acquiring a new client is five times more expensive than keeping an existing client? Maintaining clients is imperative to any business.
Retention rate is the percentage of customers a business retains over a given period of time.
Do you know your client retention numbers? If not, use this formula.
To determine your customer retention rate, you just need three numbers:
- Customers at the start of a given period
- Customers at the end of that period
- New customers acquired during that period
To calculate your customer retention rate, take the number of customers you have at the end of the period and remove the number of new customers acquired during that period. Then divide that number by the customers you started with.
For example, if you start a month with 100 customers, and 85 of them are still customers at the end of the month, your customer retention rate is 85%. Here’s a simple formula:
(Customers you end with – new customers)/customers you started with.
To express it as a percentage, simply multiply your answer by 100.)
Aside from repeat purchases, retaining clients can often result in referrals that can lead to more sales. Here are a few ideas on how you can retain clients:
- Set realistic expectations. Be clear on what they are getting from you and/or your company. Be realistic as possible, and then look for ways to over-deliver.
- Know your customer. Work with them to set clear goals that they want to accomplice and establish the success metrics (KPIs) that need to be tracked and measured to ensure you stay on track.
- Engage with your customer. Remind them of upcoming payments. Share useful and valuable information that can help build trust and rapport. Help them avoid any unwanted surprises.
- Gather customer feedback. Deploy simple campaigns to capture customer feedback and recommendations that you can use to improve your business/products/services.
6. Cost of Acquiring New Clients
While marketing and advertising costs are monitored as part of your operating expenses, it’s also essential to monitor the cost of acquiring new clients (also referred to as CAC – customer acquisition cost).
To calculate your CAC (customer acquisition cost), you simply add up the costs associated with acquiring new customers (the amount you’ve spent on marketing and sales) and then divide it by the number of customers you’ve acquired.
If you spent $12,000 on marketing and sales in a year ($1,000 a month), and you acquired 120 new customers (10 a month), your CAC would be $100.
$12,000 divided by 120 customers = $100 to acquire a new customer.
Marketing and sales expenses can include:
- VA or Marketing Team
- Advertising Costs (such as Facebook Advertising, TV, Radio, Events, or Print)
- Email Marketing Campaigns
- Social Media Marketing Campaigns
- Sales Wages and Commissions
While this is not a typical KPI (metric) to measure your business success, it’s still essential.
Make sure you keep track of yourself in your journey as a business owner and entrepreneur.
If you over-commit to too many things, you will create stress and chaos in your life. It’s also very likely that over-committing will result in you dropping the ball and not giving your clients your absolute best.
Too many women forget to say no to people because they want to ensure they keep their relationship in a good space. The problem arises when you say yes to everyone else; you also say no to you.
Your energy decreases, and so does your time to get things done that are most important to you. You may want to learn something new to assist your clients down the line, but when you overcommit, you do not leave open the space for you to grow and improve, and then you give yourself a “good reason” to not raise your prices and to stay in the same place for a long time. That can hurt your bottom line in business just as much as any of the other five items mentioned above.
Have you ever heard that a small leak can sink a big ship?
Imagine what a small leak can do to a small business!
While there may be other metrics, you should measure specific to your goals, tracking these KPIs will get you on the right track to monitoring your business success.
If you have a vision for building a successful business and need help from a coach, I’d love to help! I’ve spent the last 30+ years building and running a multi-million dollar service-based business along with my husband. I started “Be a Legacy” to share my insights and lessons learned and help other businesswomen create a life and business they love and a legacy they can be proud to have built.