How do you plan for your business you’ve been working really hard on to be successful, if you don’t know what success looks like?
In a world where business success means something different to everyone, it can be difficult to define how well you are doing if you do not have clear goals in place, and metrics to solidify these.
Let’s unpack how you can define what success looks like for your business.
What are business metrics?
Business metrics are a quantifiable measurement that can be used to provide valuable insights into how well your business is doing and point to things that need to be improved to get you to where you want to be.
Some metrics you’re already aware of is probably your revenue growth, or gross profit margin. But according to Forbes, this isn’t nearly concrete enough to give you a meaningful answer to whether or not you’re moving in the right direction.
To really understand how well your business is performing, there are certain data points you need to collect and analyse across several business areas. These are known as success metrics, or key performance indicators (KPIs).
The challenge is choosing the right KPIs to track.
Why are key business metrics important in business?
Decision-making without a full understanding of the health of your business, is like shooting in the dark.
Good business metrics can help you answer key strategic questions such as whether or not you ought to hire, how many – and which business area needs more attention.
However, there are certain drawbacks that you must consider, including the possibility of becoming too overly focused on one, the risk of reporting some inaccurately, and oversimplifying data points.
How do you measure a successful business?
Looking at how well a business is doing isn’t just about looking at the difference between the profit margin, business expenses, monthly recurring revenue and other financial metrics.
Instead, business performance and the metrics you should measure should take into account things such as your business goals, operating expenses, sales growth, marketing costs, employee productivity, production costs, the number of loyal customers you have and more. The list is endless.
This way, you can have a picture of what’s going on, understand your cash flow forecast and what’s ahead to make those important business decisions.
Let’s unpack what this looks like practically.
What key metrics should a small business track?
Whether or not you run a B2B or B2C business, some metrics that you track will differ to the ones that another business owner may pay attention to, depending on your business objectives.
But there are some core metrics that all small business owners need to be aware of, including: cash flow, gross margin, accounts receivable. We unwrap what these important metrics show and look into other metrics that most successful businesses pay attention to.
Performance metrics
Let’s consider which business metric will bring the most value to you in your quest to better understand your business needs and where it is heading.
Financial metrics
Whether or not you run a B2B or a B2C business, every small business owner needs to have a solid understanding of the following financial metrics to understand both your business health, and potential value.
On the other side of the coin, having a solid understanding of financial metrics also comes in handy when you are thinking of investing in a business.
1. Cash flow
There are three types of cash flow you need to be aware of: operating, investing, and financing cash flow.
Operating cash flow: looks at day-to-day operating activities such as income from sales and output from salaries. Often referred to as OCF.
Cash flow from investing: looks at how much cash has been generated or spent from investment-related activities. Often referred to as CFI.
Cash flow from financing: looks at the net flows of cash used to fund the company. Often referred to as CFF.
2. Revenue
There are different types of revenue streams depending on the types of activities your business carries out.
The most notable one is revenue from goods sales, or service fees. This is the core operating revenue model for most businesses. Other types of revenue include:
Transaction-based revenue: looks at proceeds from sales of goods, often from one-time customer transactions.
Service revenue: looks at earnings generated by providing a service to customers and is calculated based on time e.g. an hourly rate.
Project revenue: looks at earnings from one-time projects with existing, or new clients.
Recurring revenue: looks at earnings from continuous payments such as subscription fees.
3. Return on investment (ROI)
This looks at how efficient your business is at generating profit from the original equity from the owners/shareholders. In other words, the return of the money you invest in the business.
Sometimes, this can also be found under a marketing metric because your ROI determines your marketing strategy and budget for marketing expenses.
4. Gross margin
Your gross margin shows how profitable your business is beyond how much it spends to create and sell products.
Calculate it by looking at your business’ net sales revenue, minus its cost of goods (or services) sold.
5. Profit margin
Your profit margin looks at how much your business earns from each sale it makes. In other words, it is a measure of your business’ profitability.
Calculate it by looking at how much of every dollar in sales or services your business gets to keep from its earnings.
6. Accounts receivable
This is a record of all short-term accounts (often less than 12 months) from customers you sell to but have yet to be paid. In other words, debtors who are generally invoiced by a business.
7. Accounts payable
This is a record of all unpaid short term (less than 12 months) invoices, bills and other liabilities. Such as invoices for goods or services, or tax payments.
Sales performance metrics
Within sales, there are several groups of metrics to look out for, including pipeline sales metrics, activity sales metrics, lead generation, primary conversion, channel sales and more. What you choose to measure depends on your sales strategy.
Rather than muddying the waters, we’ll focus on basic sales key performance indicators which are important for measuring company-wide performance.
8. Net promoter score (NPS)
This score looks at measuring customer satisfaction. It reflects whether or not a customer or user would recommend your business to another person and gauges customer loyalty to a brand.
Wondering why this matters? We’ve got more information about why you should take the time to set up an NPS here.
9. Cost of selling
Your cost of selling is also known as sales expenses. It refers to the amount of money your sales strategy requires to sell the product or service. It is often measured as a percentage of revenue generated.
10. Total revenue
This is the amount of income your business is generating from all the operational and sales activities across all the products and services you provide.
11. Percentage of revenue from new business
This business metric shows how much income you’re generating from new customers. The timeframe you want to look at can vary from every month, to every quarter.
12. Percentage of revenue from existing customers
This refers to how much income you generate from upselling and cross-selling customers, repeat orders and extended contracts. In this case –
Upselling: looks at the encouragement of a purchase of something in addition to what the customer is getting, such as an upgrade, or premium option.
Cross-selling: looks at the encouragement of a purchase of something in conjunction with the primary product, such as the purchase of payroll software, in addition to HR software.
Marketing metrics
Traditionally, sales and marketing teams operated in strict silos. But, you may want to reconsider your sales process and strategy to boost your marketing efforts.
After all, research shows that the best revenue growth efforts come from close collaboration with sales and an alignment on your go-to-market strategy. After all, team work makes the dream work.
13. Marketing qualified leads (MQLs)
This is a lead that the marketing team believes is likely to become a customer. They determine this by looking at data such as what content someone downloaded.
Usually, if the sales team agrees with this person being a lead, then that lead becomes a sales qualified lead (SQL) who will hopefully be converted into a customer after going through the sales funnel.
14. Customer satisfaction
Have you ever avoided or bought a product or service based on reviews on platforms such as Trustpilot? Similar to the NPS mentioned above, a customer satisfaction score looks at how a customer rates their experience with your product or service.
Customer feedback is a powerful tool that can help you build new customer relationships.
15. Customer lifetime value
This metric looks at the total revenue a business can expect from a single client account throughout the business relationship.
In other words, the longer a client continues to purchase from a company, the greater their lifetime value becomes.
16. Customer acquisition cost
This refers to the amount of money a business spends to get a new customer. Looking at this is helpful to measure the return on investment of marketing efforts to grow their clientele.
Calculate it by adding all the costs associated with converting the prospect into a customer, such as marketing efforts, advertising, sales.
17. Cost per lead
In order to acquire customers, you have to bring in new leads. Lead generation measures the dollar amount of each new lead by marketing campaigns, channel or overall spend. It is a sales and marketing metric that helps determine better goals, adjust budgets, and track ROI.
Budgets related to cost per lead include things such as paid ad placements and social media monitoring platforms.
18. Click-through rate
This is the number of times an ad, link or web page is clicked on compared to the number of impressions. This metric reflects on how well the ad has been placed, and how persuasive it is.
A high CTR is good, and a low one reflects on your bounce rate which is the percentage of website visitors who look at one page then leave.
Human Resources metrics
While there is more to people than statistics, as a business it is still important to keep abreast of things such as your recruitment, retention and wellbeing.
Performance management and workforce optimisation plays a huge role in how you can manage your team effectively, and the HR metrics you choose to measure makes a significant impact on your business and growth strategies.
To keep it simple, we’ll be paying attention to recruitment metrics and wellbeing metrics.
Recruitment metrics
19. Headcount
This metric looks at the total number of employees across your business. You may also want to keep track of the total across specific departments per quarter and per year to keep track of your business growth rate.
20. New hire turnover
This looks at the number of new hires who leave within a set period of time, such as within their first year. You’ll want to keep track of this to figure out how to move forward with your retention strategy, because of the high cost of training someone new.
If this is looking rather high, we’ve got some tips on how to reduce your staff turnover.
21. Diversity and inclusion
Companies are now paying more attention than ever to diversity, equity and inclusion. But it still continues to be one of the most difficult metrics to track and it’s not enough to just track the number of diverse employees you have.
Some common diversity metrics include hiring metrics, promotions, advancement metrics and retention rates.
Hiring metrics: looks into the job applicants that make it through your interview rounds, and the ones that do not. You can easily keep track of this using an applicant tracking system (ATS).
Promotion and advancement metrics: looks into how diverse your workforce is and includes ethnicity and gender inclusion. Consider if you have people who identify as women or good representation of LGBTQ+ colleagues at board level. Or whether or not you need to facilitate training to combat unconscious bias.
22. Cost per hire
This measures the average cost of hiring a new employee. It is calculated by adding internal and external hiring costs, then dividing this total by the number of employees you hired in a given period.
If your external costs are proving too high, it might be time to look into an all in one HR system that can help you with all stages of hiring, onboarding and offboarding.
Wellbeing metrics
Employee retention is just as important as customer retention. After all, a happy team is a productive team and your people are at the core of your business success strategy.
Look after your team by keeping track of these metrics.
23. Employee burnout
Thanks to the global pandemic, employee burnout has spread like wildfire over the last few years. 58% of employees reported that it had affected them within the past three months. And, with the rise in the cost of living around the world, its importance has only increased.
Across the world, four in five HR leaders report that mental health and wellbeing is a top priority for their business.
Keep track of your team’s wellbeing by making sure that they are taking the right amount of leave to maintain a work-life balance. If you don’t have a leave management system in place yet, use one that can keep your payroll updated and empower your team to easily book time off without the hassle.
24. Employee engagement
Employee engagement plays a huge role in your retention strategy, so it’s important to keep track of how well they are doing.
If you want to get valuable feedback that you can use, make use of software that empowers your team to submit anonymous feedback, so that you can really make a difference.
Employment Hero can help as your business grows
As you form your business strategy for 2023, don’t fall into the trap of making this a numbers game. Small business metrics aren’t just about performance metrics, or finance metrics. There are people behind those profit margins.
Make sure you get a system in place such as Employment Hero that looks after the people behind your success as your team continues to go from strength to strength.
If it’s your first time moving away from manual HR, you might want to check out our guide on why digital transformation might be for you.