When Jack came up with a novel idea for a service that his locality needed, he put his ideas to work, did a bit of research, secured some funding, and put together a team of managers and directors. With his small business up and running, he was finally living his lifelong dream to be an entrepreneur.
However, five years later, his startup turned out to be so unprofitable that he had to liquidate some of his assets just to compensate his creditors. Eventually he had to close shop, bidding goodbye to everything he worked hard for.
What could’ve gone wrong? It had nothing to do with how enthusiastic he was or how many hours he put in. No, it’s not the economy either.
Aspiring entrepreneurs like Jack start businesses for different reasons, but every business has the same goal: to make money by providing a product or service needed in the market. In most cases, failure to meet this goal means going out of business. This usually happens when a business owner fails to do reality checks on their financial health, leading to bad decisions that steer their business towards the wrong direction. If you’re a small business owner, you can avoid suffering the same fate by paying attention to your business metrics.
Business metrics, by definition, monitor and evaluate how your business processes are doing through concrete, quantifiable data. By analyzing this data, you can tell whether or not your business is on the right track towards achieving its goals. Think of it as holding up a mirror to your business to see how your expectations match with reality.
What small business metrics you should measure
There is no one-size-fits-all approach to business metrics. If you run an online business, for instance, you need to know how many unique visitors your website is getting or how many people downloaded your app. If your business provides subscriptions, you must be aware of your churn rate (the percentage of customers who end their subscription), monthly recurring revenue, lifetime value, and customer acquisition cost, among other things.
On the other hand, there are business metrics that every small business owner should know. Being able to navigate, evaluate, and interpret these metrics will help realize your business’ full potential:
- Cash flow: How much cash is moving in and out of your bank accounts?
- Sales revenue: How much money is your sales team bringing in?
- Net profit margin: How much profits are you generating?
- Customer loyalty and retention: Do your customers like you?
- Customer lifetime value and customer acquisition cost: How much does each customer bring to your business? How much does it cost to gain new customers?
Five metrics to measure your business performance
1. Cash flow
Your cash flow shows how much cash goes in and out of your business at any given time. When you spend cash, this is recorded as negative cash flow. When cash comes in, this is positive cash flow. While it’s a key indicator of business health, bear in mind that cash flow must not be confused with profits.
Cash flow shows you how much cash you have to cover spending such as operation expenses, purchases, wages, and debt. Run a cash flow analysis at least on a weekly, monthly, and quarterly basis. Otherwise, you might end up overspending and unable to cover future costs.
You can track your cash flow in real time, through a cash flow dashboard, like the example below:
In this dashboard, you can track your net cash flow (net amount) as shown by the yellow line, along with the incoming amount (positive cash flow) and outgoing amount (negative cash flow) over a specific period. It also displays a detailed record of incoming and outgoing transactions. As the process is automated, a cash flow dashboard helps you track and manage your business expenses and shows what drives negative and positive cash flow. With this data, you can figure out what improvements or adjustments you have to make. This information cannot be derived by simply looking at basic financial statements at the end of a quarter or year.
2. Sales revenue
Is your sales team bringing in money fast enough to cover your current expenses and meet your long-term goals? The first step towards answering this question is knowing your sales revenue. This is the income from goods and services your customers purchased from you minus the cost of returned or undelivered goods. From this data, you can see if your business is doing well or not.
You need to analyze your sales revenue on a monthly or yearly basis. Monthly fluctuations in revenue aren’t necessarily a bad thing. Identifying busy or slow months through tracking your monthly sales revenue helps you develop appropriate strategies for each month or season. It also helps you plan your cash flow to make sure your business will always have enough money to cover expenses in slow seasons.
Tracking your annual revenue, on the other hand, gives you the bigger picture and allows you to evaluate your performance for an entire year. This also helps you set targets for the following years.
With a revenue dashboard or sales analytics dashboard, you can view how much in sales you generated for each month, as well as the top performers, top customers, sales revenue growth, working capital, fiscal year analysis, and opportunity win rate. You can also generate more sophisticated data such as your asset turnover ratio, return on sales, and return on assets. Through these metrics, you can compare your performance with other businesses in your location or industry and find out if your business can survive the competition.
3. Net and gross profit margin
As key indicators of your business health, both the net profit margin and gross profit margin are indicators of how efficiently each dollar you spend turns into profit.
Gross profit margin, also referred to as gross margin, shows revenues in proportion to production costs. From this data, you can infer if every dollar you spend on production is actually worth it. To arrive at this figure, you take the total revenue and subtract the cost of goods sold (COGS). Then, divide it by the total revenue and express it as a percentage. In summary, the formula is:
Gross margin = [(Revenue-COGS)/Revenue] x 100
This calculation, however, does not take into consideration other costs such as operating expenses, taxes, depreciation, interests, and other outflows. This is why you also need your net profit margin.
To arrive at your net profit margin, you must figure out your operating income, also known as earnings before interest, taxes, depreciation, and amortization. This is your revenue from sales minus COGS and operating expenses.
Operating income = (Revenue – COGS) – operating expenses
From this figure, subtract other expenses such as taxes, interest, and all other expenses to arrive at your net profit. Then, divide the net profit by your total revenue. The quotient, expressed as a percentage, is your net profit margin.
Net profit margin = [(Operating income taxes and interest)/Revenue] x 100
Both of these business metrics provide you with valuable insights about your business. Your gross margin shows if production costs are getting too expensive in proportion to your gains. From that information, you can tell if you should stick with your current suppliers or maybe look for new ones. Or this could be your basis for increasing prices or decreasing prices due to high or low production costs.
On the other hand, your net profit margin provides a more definitive measurement of profitability. Keep in mind that more sales don’t necessarily mean more profits, as you may have incurred higher costs in taxes or other expenses. As an overall measure of business health, your net profit margin should always be positive.
How much net profit is ideal? As a business owner, make sure that you turn enough profit to pay yourself. On top of that, you need a net profit margin of at least 15% should you decide to sell the business later on.
With a net profit dashboard, you can track and assess your net profits over a period of time with just a few clicks.
4. Customer loyalty and retention
Can your business attract the right customers? Do your customers come back for your product or service? Would they recommend your business to others? How much would each customer spend on your product or service on average? These questions are best answered by customer loyalty and retention, which is another important business metric every small business owner should consider.
Although it seems highly subjective and hard to track, especially if you’re in retail, there are several ways to measure customer loyalty. You could do customer surveys, ask for direct feedback at point of purchase, or implement purchase analysis studies. While it may sound tedious to gather and analyze these data, the returns are well worth it. Experts agree that as little as five percent improvement in customer loyalty and retention could translate to increased profits of up to 100% depending on your industry.
A customer loyalty dashboard can help you monitor and assess all the necessary data to gauge customer loyalty, such as your customer demographics. This will also help you tweak your marketing and advertising strategies based on what your customers need and want.
5. Customer lifetime value (CLV) and customer acquisition cost (CAC)
In relation to customer loyalty and retention, you should also monitor how valuable each customer is to your business in measurable terms and how much would it cost to acquire new customers. Having a grasp of these business metrics, known as customer lifetime value (CLV) and customer acquisition cost (CAC), is crucial to helping your business profit and grow.
To calculate CLV, multiply the average sale by the number of repeat transactions, multiplied by the typical retention time of each customer. If you’re running a subscription-based service that charges $20 each month, with each customer subscribing for 10 years on average, then your CLV is $2,400. In other words, CLV is how much money your customers would spend for as long as they patronize your business. Knowing your CLV is valuable, because it gives you perspective on how much you would be willing to spend to acquire customers, make them stay, or keep them coming back.
Closely related to CLV is the cost of acquiring new customers (CAC). Your CAC – the total amount you spend on marketing and advertising divided by customers acquired over a given time – can be limited or increased based on your CLV. Ideally, customer acquisition costs shouldn’t be higher than 1/3 of CLV. Comparing your CAC with your CLV over different time periods can also show you when are the best times to acquire new customers and when they are more likely to leave.
Performance dashboards to measure small business metrics
In a nutshell, tracking your business metrics gives you several advantages to stay on top of your business. With the information you derive from these metrics, you can easily:
- Keep track of how much money you have to cover expenses;
- Benchmark your performance over certain periods of time and against competitors;
- Assess which marketing and advertising strategies convert into sales;
- Evaluate your business health in terms of profitability, both in the short and long term;
- Figure out if you’re efficiently spending money on production costs; and
- Recognize areas where improvements and adjustments are necessary.
Any business owner with good sense would want to achieve all of them, but keeping track of these metrics could be time-consuming and complicated when you don’t use the right tools. It’s a good thing more businesses are moving towards technologies that automate all the necessary calculations and integrate all these metrics in one place. An online business dashboard with information that is accessible in real time provides a clearer, more comprehensive picture of how a business is performing.
Not all business dashboards, however, are created equal. To make the most of your data, ask your enterprise resourcing planning (ERP) software provider the following questions:
- Does your dashboard provide good visibility for your business metrics? Aside from featuring a stunning graphic interface, your dashboard should easily show you insights that matter, such as real-time analytics and notifications for potential problems like negative cash flow and lower revenue.
- Is it customizable? As different industries have different ways of analyzing business metrics, a good dashboard should provide business owners the option to customize their dashboard according to their business’ requirements.
- Does it show the basics? Basic information such as customer receivables aging, forecasts on your cash flow, or sales analysis should be easily viewable from the dashboard. It should be concise enough to show high-level data, without having to show too many details at once.
- Is it user-friendly? A good business dashboard must be intuitive enough that users would not have too much trouble trying to navigate it. Ideally, any business owner should be able to navigate it without any help.
- Can users access information quickly? It shouldn’t take longer than eight to 10 seconds to launch a dashboard. Too much data loaded in one screen can slow it down.
This example from the SAP Business One Dashboard displays key business metrics in one page. While SAP Business One comes with predefined dashboards for different aspects of a business, it’s customizable based on users’ preferences. It shows you the data through visualizations such as charts and graphs that can be interpreted in a glance.
Such an integrated and comprehensive dashboard will give you a good grasp of your metrics, enabling you to make decisions that will make your business stand out.
Learn more about how SAP Business One can help you keep track of your business metrics through an integrated, user-friendly, and visually appealing performance dashboard that you can update in real time. Start your free SAP Business One trial now.