When it comes to running a business, information is power. In fact, the businesses I work with that are most successful are the ones with regular reporting on key metrics.
The more you know about your performance, the better your chances of improving results. It’s not enough to have a general idea of how you’re doing. You need to be taking detailed measurements from all areas of your business.
While this may entail a lot of work, you’ll form good habits, and it will pay off in the long run. Better information leads to better decisions, and better decisions lead to greater profits. Here’s our guide to picking the right business metrics and how to turn that information into a recipe for success.
What is a business metric?
A business metric is a measurement that helps you gauge your performance in a specific area. It can relate to any aspect of your business, but it has to be quantifiable. That is to say, you must be able to assess it in numbers. Sales, Gross profit and net margins are all examples of common metrics.
Which metrics should I use?
The exact metrics you choose will depend on the nature of your business, but there are some things that are usually worth measuring. These include:
- Sales revenue. This is how much money you make from sales once you have subtracted any returned items. It’s the easiest way to see if people are buying your product or service.
- Gross profit. This is the amount you make from selling your goods or services, minus the cost of producing or delivering them. If your gross profits are low for your sector, you need to increase your prices, improve efficiencies or cut costs.
- Net profit. This is the total profit you have left once you subtract all the business costs. Unlike gross profit, this allows you to spot costs that may not be delivering value or simply not needed that aren’t directly related to production.
- Customer retention. This is the percentage of your customers that continue to use your services. It’s much cheaper to keep an old customer than to gain a new one, so improving this metric is a great way to increase profits.
What are KPIs?
You may have heard of KPIs (Key Performance Indicators). These metrics focus on a particular goal, rather than a general measure of performance. KPIs are specific to your business, and will usually include a timeframe for success. Examples include:
- Retaining a certain percentage of customers over a given period of time.
- Improving gross profit percentage before the end of the financial year.
- Reaching a certain level of customer satisfaction by the end of the quarter.
- Improving cash at the bank over a set period of time.
KPIs are a great way to improve performance in a single area, but you should be wary of using them as an indicator of overall financial health. You may be meeting your KPIs but struggling elsewhere, so it’s essential to use general metrics. You should also be careful to set achievable KPIs. Otherwise, you run the risk of demoralising your staff and potentially yourself!
What are the advantages of measurement?
Whatever your business, there are many advantages to measuring your performance:
- You can spot weaknesses in your business model at an earlier stage. This allows you to change course before too much damage is done.
- You can see the effects of any changes you have made without waiting for the end-of-year figures. This helps you to stay flexible, doing more of what works and less of what doesn’t.
- You can make better decisions about the future of your business, setting realistic goals based on facts rather than intuition.
- You can get a clearer picture of employee performance. The data you gather may help you spot areas where extra training or motivation are needed.
It’s not enough just to measure your performance. To reap these benefits, you also need to act on the results. Try to get into a routine of converting data into reports. These reports should form the basis of regular business meetings in which you discuss your progress and plan your next steps.
If you’re struggling to measure your performance, or need some tips on using the data effectively, don’t hesitate to ask us for help.