If you are a follower of professional sports, then you must be aware of the fact that you can’t judge a player’s value or ability to perform down to a particular statistic the key metric is not enough to unveil that much insight — therefore, so does analytics. You have to consider various statistics or metrics to get a complete picture of a player’s ability to perform and truly gauge their value.
The same principle applies in the business as well. You can’t just apply one metric to gauge your financial performance. If you use this method, then it is way too limiting. To truly calculate the value of your business, you have to track various metrics together to get a complete picture that will help you understand your ability to perform.
Today, In this blog post, we’ll be discussing the seven key metrics that every business should track, as it will enable you to assess your business’ performance from a more holistic point of view and scale your growth in multiple ways.
Key Metrics Every Business Should Track
1. Revenue Growth
Revenue is the sales amount that you generate by selling your product after excluding the returned or undeliverable items cost. It’s the key metric that every business utilizes to estimate its financial performance. Generating the highest revenue possible is ideal, but the metric that’s more indicative of the financial performance of your business is year-over-year revenue growth.
It would help if you also kept in mind that the situation of your business is entirely different than your competitors’, even though you compete for the same consumers. So it’s better that you contend against yourself and compare your current revenue and growth of revenue with your past financial performance rather than comparing it to your competitors’.
Otherwise, you could either fix a revenue or revenue growth goal that is not achievable within your particular context. It may let you miss your targets, urge your employees to cut corners to hit their numbers, and, eventually, burn everyone out.
2. Average Fixed Costs
Fixed costs are those costs of the business that remain constant regardless if your business is selling more or less of its product. For instance, rent of office space, website hosting costs, utility bills, manufacturing equipment, small business loans, property tax, and health insurance: all these are all fixed costs examples as they all will occur regardless of how much product you develop, ship out, and sell, these costs remain the same each month.
To determine how much your business needs to pay for every unit of your product before you estimate the variable costs required to produce them.
Therefore, you have to calculate your average fixed cost: your total fixed cost divided by your total number of units produced.
It will help you to calculate the level of impact your fixed costs have on your product’s potential for profit and how much you should pay for variable costs to make a profit
3. Average Variable Costs
It is one of the important key metrics. Variable costs are those costs that incorporate all the labour and materials utilized to produce your product unit. Your variable costs straightly depend upon the amount of product you market, so the more products you sell, the higher your variable costs, and the fewer units you sell, the lower your variable costs.
To determine the variable costs your business will need to pay for every unit of your product you produce. Therefore, all you have to do is to calculate your average variable cost. To execute this, add each of your product’s unique total variable costs collectively and divide them by the total number of units of products produced.
4. Contribution Margin Ratio
The contribution margin is measured by deducting the variable costs needed to produce one product unit from the revenue it made.
Since your variable costs are linked directly to producing your product, even fixed costs are directly linked to keeping your business in operation and not building your product. The contribution margin assists you in understanding how profitable your products are.
But to understand how they individually impact your bottom line, it’s important to calculate every product’s contribution margin ratios. To do this, deduct each product’s total variable costs from their total sales revenue and divide that number by their total sales revenue. Your CMR (contribution margin ratio) will be expressed in the form of a percentage.
Once you are aware of every product’s contribution margin ratios and, in turn, their profit potential, you’ll know which products will generate cumulative profit if you create more units of them and create less total profit if you produce more units of them. These insights will help you develop a product mix capable of generating your business’s highest profit level. Thus it becomes useful to key metrics for your business.
5. Break–Even Point
Your business’s break-even point is the quantity of product you have to sell so that your total revenue is equal to your total costs. Understanding your break-even point is essential because it works as your business’s minimum objective and helps you to avoid losing money during a particular time. Even better, if you exceed your break-even point, your business will benefit during that period.
To determine your break-even point, sum up all your fixed costs and divide them by your contribution margin or the difference between your total sales revenue and total variable costs.
For instance, if you market baseball bats and your fixed costs are $500,000, and your contribution margin is $50 for the year, you’ll have to sell 10,000 baseball bats to break even. If you sell more, you’ll get a profit.
6.Cost of Goods Sold
Your business’ cost of goods sold is the cost of getting or making the products you sold during a specific period, like material, manufacturing, and labor costs. In other words, they’re your cost of sales or the cost of doing business. Tracking your cost of goods sold or COGS is crucial because they directly hit your business’s bottom line. For example, when your COGS rise, your profit will decline, and when your COGS reduce, your profit will improve.
To measure your COGS, you first have to choose an accounting method. Most businesses typically select between three: First In, First Out (FIFO), Last In, Last Out (LIFO), and the Average Cost Method.
If you apply the FIFO method, you’ll sell the oldest products you bought or manufactured first. Prices lead to rising over time, so the FIFO method will enable you to sell your cheapest inventory, decreasing your COGS and increasing your profit.
If you utilize the LIFO method, you’ll sell the latest or new products you bought or manufactured first. Prices lead to rising over time, so the LIFO method will enable you to sell your most precious inventory, which will improve your COGS and reduce your profit. Still, you’ll also pay fewer taxes, which could help you offset or even overcome that initial loss in profit.
If you apply the Average Cost Method, you’ll determine your inventory’s mean cost, totally disregarding their purchase or manufacture date. It limits periods of high inflation from influencing the cost of your goods sold.
7. Gross Profit Margin
It is one of the crucial key metrics as your gross profit is determined by deducting your COGS from your total revenue and shows your business’ production efficiency or ability to optimize your material, manufacturing, and labour costs. Nevertheless, since gross profit is an actual dollar amount and not a percentage of your revenue, it can improve even when your financial performance declines.
So to know your business’s financial performance, it’s more beneficial to estimate gross profit margin, which is your gross profit as a percentage of your revenue, instead of measuring gross profit. If your gross profit margin proceeds to climb over time, it’s a good sign that your business’s financial health is in good shape.
Tracking all of these business key metrics can be difficult and time-consuming, but it’s worth doing so. Because, just like your ideal athlete, you don’t need to create your business’s definition of success down to a single statistic. That’s way too limiting. More importantly, it’s not an accurate way to estimate your business’ value or financial performance. You can further consider performance marketing measure your efforts.