Key business metrics tell you what is really going on in your business.
Gut feelings are important as a business owner, but so much goes on that business owners are not aware of. This means you need to look at the hard numbers of your business to really know what is going on.
The International Monetary Fund (IMF) is predicting global economic growth of 5.5% in 2021. If you made it through 2020, you’ll want to take advantage of 2021, but to do that you need to know what to track in your business.
If you want to run a successful business, scheduling regular time to go through your key business metrics is a must.
Research shows that almost half of small and medium sized businesses have not even identified key metrics to track in their businesses. That means if you identify key metrics to track in your business, you have a strong chance of getting ahead of your competition.
But which key metrics to track?
1. Sales Revenue
Sales revenue is defined as the income a business receives from selling its goods or services.
Sales revenue is a metric many business owners are intuitively interested in, but decisions need to be made around how it is tracked.
Questions business owners need to ask themselves tracking sales revenue are:
1) What is the unit time you are tracking sales revenue across? (e.g monthly).
2) Have you committed time to per that unit time (e.g monthly meetings) to review whether or not your sales revenue is above, at, or below your monthly budget forecast?
In the year 2021 the global economy is projected to grow by 5.5%. It might grow even more than that in your region.
Given most businesses track the economy, such a large economic growth number means your sales revenue should also increase throughout the year. Be sure to track it
2. Customer Retention Rate
Customer retention rate is defined as the rate customers of a business are retained instead of going to a competitor.
It is typically easier and cheaper to sell a product or service to a customer multiple times than it is to find multiple new customers. That’s why customer retention rate is a key business metric.
Customer retention rate averages vary depending on the industry. For example, for streaming services such as Disney Plus and Netflix, the customer retention rate is over 50%. However, for industries centered on larger, one-time transactions the customer retention rate is lower. Therefore, customer retention rate needs to be benchmarked against your industry bench marks.
The economic growth of 2021 means that many businesses will be focused on new customers.
However, it will still be cheaper to retain existing customers than it will be to find new customers. That means your customer retention rate will be a key business metric to track as always.
3. Cost of Customer Acquisition
Cost of customer acquisition is the cost of acquiring a new customer.
The costs involved will usually be the expenses related to marketing and sales. These expenses include wages (in other words, time spent) on marketing and sales, software costs for marketing and sales such as a CRM, other professional service fees such as consultants and designers, as well as other overheads involved such as admin time onboarding.
Cost of customer acquisition is usually expressed as a ratio comparing the cost of the acquisition versus how much the customer is worth over its lifetime.
A ratio of less than 1:1 means the business will be losing money.
A ratio of 1:1 might seem neutral but will produce the undesirable outcome of a business not making any profit.
A ratio of 3:1 is considered good as it means that you’ll be in a strong position to make a profit on new customers, while spending the right amount on marketing and sales.
A ratio too high means that its possible a business is not spending enough on marketing and sales to maximise its growth and profit potential.
In 2021 many businesses will be acquiring new customers. In a business environment where there are many new customers coming in, cost of customer acquisition is a key business metric to track as it tells you if you are spending too much or too little on sales and marketing.
4. Operating Productivity
Operating productivity is calculated by dividing the outputs produced by a business by the inputs used in its production process.
The input being the capital expenditure and people, and the output being outcomes such as revenue or customer satisfaction.
When working with clients, we typically improve operating productivity by looking at these four key areas:
The outcome of improving these areas can be summarised in three ways:
- Increasing output for the same input.
- Keeping output the same and decreasing input.
- Increasing output and input, but increasing output more.
In 2021 businesses are likely to grow with the economic growth. When businesses grow the issue is often keeping profitable with good cash flow management, and that relies on efficient operating productivity. That means operating productivity is a key business metric to track in 2021.
5. Gross Profit Margin
Gross profit margin is calculated as the difference between your revenue and your costs of goods sold, divided by your revenue, multiplied by 100.
The calculation for gross profit margin remains constant across industries. However, depending on your industry the accounting work will be more complex to find your costs of goods sold and to a lesser extent revenue.
Your gross profit margin excludes your overheads, depreciation and amortization. It is therefore more of an expression of how much money you are making per product or service you are selling.
Gross profit margin should not be confused with net profit margin as explained below.
A growth environment in 2021 means that businesses operating productivity may be affected – as new staff need to be trained, for example – which has a downstream effect on gross profit margin. That means that gross profit margin becomes a key business metric in 2021 to track and review regularly as it could slip.
6. Net Profit Margin
Net profit is defined as a ratio of the revenue minus the costs of goods sold, expenses, depreciation and amortization, interest and taxes. To then find the net profit margin, you divide your net profit by your revenue and multiply it by 100.
Your net profit margin tells you how much profit will be left over per dollar of sales. For example, if your business has a net profit margin on 23%, you will have 0.23 cents per dollar left over as profit from sales you make.
Different industries have different net profit margins as benchmarks, so this is where understanding your industry benchmarks becomes critical.
Once you have an idea of your industry benchmark for net profit margin, set some time aside to track yours to make sure you are keeping up with the average or above it.
In 2021 overheads will still be affected by the pandemic. It is unclear exactly how a post-covid world looks globally, but trends such as working from home and outsourcing seem to be on the rise. If a significant enough portion of your team is no longer working in your office, it might be worth having a look into reducing your leasing overhead by downsizing your office and therefore improving net profit margin.
7. Overhead Costs
An overhead is defined as an ongoing expense which results from operating your business.
Overhead costs vary by industry and business size, but typically include rent, administration staff wages, utilities, insurance etc.
In 2021 overheads may be reduced by the changing working trends, but at this stage much of that is speculation.
If your business grows in 2021 make sure that you are adequately supporting that growth with the right amount of overheads. At the same time, ensure your overheads are not higher than they need to be.
It might also be time to take a look at what you are able to outsource in your overhead structure.
The changing overhead environment in 2021 and beyond means it becomes one of your key business metrics.
If you would like help relating to any of these key business metrics check out our CFO Growth Package or get in touch with us by filling out the form below.