Measuring the right financial metrics is key to the ongoing health of your business. They can provide important insights into how well your business is doing, and allow you to make informed decisions to maximise your growth into the future. If you want to keep your business on track, you simply cannot ignore the process of developing financial metrics for monitoring your progress.
The specific metrics you need to monitor to achieve financial success will vary depending on your industry – but regardless of the size of your business, you should be monitoring these ten key metrics:
- Sales revenue
You’ll need to correlate your sales data to your advertising campaigns, price changes, seasonal forces, competitive actions, and other costs of sales.
You can use asset turnover ratio, return on sales, and return on assets ratios to compare your business against others in the same industry or location.
- Operating productivity
High staff productivity can be one of your company’s best assets and must be measured. You can apply productivity ratios to almost any aspect of your business.
Compare your productivity to industry statistics, and use your business’s accumulating statistics over time to measure improvement.
- Gross margin
Gross margin is calculated as your total sales revenue minus your cost of goods sold, divided by your total sales revenue. It is expressed as a percentage ¬– the higher the percentage, the more you are retaining on each dollar of sales you make, to service your other costs or enjoy as profits.
Tracking margins is especially important for growing companies, since increased volumes should improve efficiency and lower the cost per unit. But improving your margins may require both effort and innovation.
- Profit or loss
You should be preparing profit and loss statements on a monthly basis and analysing them against your budget targets. If you are not meeting your budgets there must be justifiable reasons and you should focus on these areas in future months.
- Overhead costs
Overheads are fixed costs that do not vary with the level of goods or services you sell. It’s important to track these on a monthly basis so you can clearly see where your business is spending its money.
Use this information when updating your business plan or preparing yearly budgets. If you need to cut your fixed costs you could consider strategies like moving to a location that is less expensive, or switching utility suppliers.
- Variable costs
Variable costs are expenses that change in proportion to your activity.
It’s useful to track these so you can make sure they are decreasing as the volume of product you sell or produce grows – and that they are consistent with industry trends so that your business will remain competitive.
- Inventory
Inventory is one of the most important assets of many businesses. Turnover of that inventory is one of the primary sources of revenue, and it must be managed carefully.
It’s important to find the balance between having too much stock, which can tie up your precious working capital, and not having enough to meet customer demands, leading to lost sales or lower market share. You can find guidance on how to forecast and manage your inventory here.
- Marketing and advertising
Investment in marketing and advertising can be a hefty cost to your business, so you need to measure that investment to see that it is paying for itself.
This metric assess the total cost associated with acquiring each new customer. Over time, your customer acquisition costs should go down, as your company and reputation grows and people become more familiar with your brand.
- Customer loyalty and retention
Your business needs to be able to attract the right clients or customers and keep them. A happy client will refer your business or brand to others, bringing you new customers with no acquisition costs.
There are three common methods for measuring customer loyalty and retention: customer surveys, direct feedback and purchase analysis.
- Break-even analysis
Break-even analysis is the process of finding your find break-even volume (the amount you need to sell to cover your costs and make no profit or loss).
It involves analysing relationships between your fixed and variable costs and your sales volume, pricing, and net cash flow. Understanding how these factors impact each other is crucial when it comes to budgeting, production planning, and profit forecasting – and break- even analysis is central to this understanding.
There is no ‘one-size-fits-all’ when it comes to choosing financial metrics for your business, and you should use a mix of quantitative and qualitative factors.
However, one thing for sure is that you do need to monitor your numbers on a regular basis to keep your business health in check. Financial analysis will guide your business away from financial pitfalls and towards important opportunities, and put you on the path to lower risk and increased sustainable cash flow.