Six Performance Metrics for Business Success
If your goal is to build a healthy business that can withstand the test of time, you’ll need to understand its health, status, and trajectory. Business performance metrics go deeper than traditional financial statements, and allow you to measure and track key performance indicators. They explore the factors that influence your financial statements and open your team to opportunities for growth and advancement.
The list of measurable metrics is endless. It can become quite easy to overwhelm yourself with starting points and application. Because performance metrics can be industry-specific, your team should start by setting specific objectives, like achieving a certain level of sales, user growth, or retention. With that, you can then determine which areas of the business need your focus and measure the efforts over time.
We’re going to cover six of the most commonly used performance metrics, what they mean, and how you can use them to build a better future for your business.
1. Change in Sales Revenue
(Current Period Sales Revenue - Prior Period Sales Revenue) / Prior Period Sales Revenue
There’s no clearer-cut way of measuring business growth than by assessing revenue changes over quarters and years. This metric will be a high-level indication of how your business is performing and act as a foundation for any additional metric assessments. Keep in mind that change in sales revenue lacks crucial details about why the change is occurring, so you’ll need to be prepared to dig deep.
2. Change in Operating Cash Flow
(Current Period Operating Cash Flow - Prior Period Operating Cash Flow) / Prior Period Operating Cash Flow
Cashflow is the bloodline of your business. Understanding how your operating cash flow is changing monthly, quarterly, and annually will allow you to keep it in check. Based on your operating expenses and growth plans, varying cash amounts will suffice. That said, it’s crucial to measure changes in cash flow, and why they are happening, to avoid cash crunches.
3. Customer Acquisition Cost (CAC)
Total Marketing Spend Over Period / Number of New Customers Over Period
Understanding the resources that go into customer acquisition is critical for scaling your business. By comparing the total amount of money spent on marketing efforts with the total number of clients acquired over the same period, you’ll be able to gauge the cost of new clients. You can then compare this cost with your estimated Customer Lifetime Value to determine whether the investment was worthy.
If you spent $5,000 on marketing initiatives in one month and acquired 50 new clients, assuming each client has a Customer Lifetime Value of $150, you’ve generated a 50% return on your invested marketing dollars. You could take this data and scale-up, allowing you to gauge growth potential if more was spent on marketing initiatives.
4. Customer Lifetime Value (CLV)
Average Revenue Per User x Anticipated Number of Payments
As mentioned in the CAC explanation above, Customer Lifetime Value will tell you how much each customer acquired is worth to the business. It’s an important metric that allows you to accurately forecast the return on initiative investments, revenue growth, and business scalability. It’s also important to measure the change in CLV over time. If your customer base shows a decline in dollars spent throughout their life, you’ll need to determine why. By finding unique ways to cross-sell, upsell, and expand your offerings, you’ll be able to maximize the dollars generated per.
Note that the anticipated number of payments in the equation above refers to repeat product purchases or service subscriptions.
5. Customer Retention Rate
((Customers at end of period - Customers acquired during period) / Customers at start of period) x 100
It’s been known for decades that acquiring new customers is significantly more expensive than retaining those you’ve already captured. That said, it's vital to your business's growth that you monitor customer retention and find ways to prevent user churn. Churn reduction will not only allow you to strengthen your bottom line, but act as a launchpad for referral growth. Treating customers well leads to recommendations within personal circles, and once that fly-wheel gets spinning, it’ll prove invaluable to the future of your business.
6. Change in Gross Margin
(Current Period Gross Profit Margin - Prior Period Gross Profit Margin) / Prior Period Gross Profit Margin
Changes to your gross margin are a great indication of improving or deteriorating operational efficiencies. It’s a number that highlights how much of each sales dollar is being captured and can be used to determine where improvements must be made to the business.
Understanding which metrics to pay attention to is half the battle. Now that you’re equipped with the necessary tools, start to run some analysis on your business and see how things are performing. Please take what you find and use it to encourage positive change.
If metric assessment and implementation isn’t your forte, you’re not alone. Get in touch with our team, and we’ll help get you moving in the right direction.