What started out as a passion or hobby is now a thriving business. But is thriving the same thing as growing?
“Measuring growth will differ from business to business, depending on what their goals are,” explains Jonathan Chan, head of marketing at Insane Growth. “In my personal experience, we measured growth by the number of repeat customers we were able to generate from our ‘mini-products.’ This was a great indicator of how effective our strategy was and how many loyal customers we were attracting.”
While every business will have its own unique set of key performance indicators (KPIs), there are some common KPIs that every small business should know. In this article we will examine cover:
- Sales revenue
- Net profit and net profit margin
- Gross profit and gross margin
- Monthly recurring revenue
- Customer acquisition cost
- Additional resources to help you understand small business finance
1. Sales revenue
Revenue is the first KPI most businesses evaluate to gauge their success and market demand. Sales revenue refers to the income from all customer purchases. Returns or undelivered services are subtracted from this income to get the final sales revenue result.
Other important KPIs within revenue are revenue per employee and revenue growth rates.
Revenue per employee allows you to quantify the productivity and value of an employee. This can help you determine whether to grow or reduce the size of your team.
Measuring revenue growth rates requires breaking down measured performance by a time period, say a month, quarter, or year. For example, comparing sales revenue from March 2019 to March 2020 can show you market fluctuations, changes in consumer demand, and may provide insights regarding factors impacting growth or decline.
2. Net profit and net profit margin
Unfortunately, your sales revenue is not your net profit or take-home pay. Net profit, sometimes referred to as the bottom line or net income, is the amount left over after all expenses, including the cost of goods sold, operating expenses, and debt, have been accounted for.
Net profit = Revenue – The cost of goods sold – Operating and other expenses – Interest – Taxes
“Know your numbers,” advises Michelle Boxx, CEO of Boxxbury Marketing, LLC. “Many small businesses think too small. It’s important to realize your market potential – many businesses can be multi-million dollar companies – and build out your business model to make sure your price and the way you conduct business is viable to that point.”
While knowing your net profit is important, your net profit margin is a stronger indicator of your business’s financial health. Your net profit margin is the percentage of net profit generated by your company’s revenue.
Net profit margin = Net profit / Revenue
“If you realize that your margins are slim or never improve over time, you may need to raise your prices or change the way you market your product or service entirely to scale properly,” Boxx elaborates.
3. Gross profit and gross margin
Related to net profit is gross profit. The calculation of gross profit only takes into account the variable expenses involved with generating revenue.
Gross profit = Revenue – Cost of Goods Sold
Gross profit margin shows you how a product, or groups of products, is performing in your business and measures your business productivity. By monitoring your gross profit margin, you can address any potential weakness in your business before it becomes an issue.
Gross margin = Gross profit / Revenue
4. Monthly recurring revenue
If you are operating a subscription-based business, then monthly recurring revenue (MRR) is one of your most critical business metrics. Instead of continually landing one-off sales, your focus is placed on retaining customers and preventing churn.
“One of the best business growth strategies I can recommend is trying your product or service on a small target market to ensure product-market fit and then scaling it to make a profit,” recommends Cassy Aite, CEO and co-founder of Hoppier. “When you try out your product on a more modest target market, you get a chance to see some of the most relevant metrics, such as CAC, LTV, MRR, and others.”
While MRR might seem straightforward, there are different aspects of MRR to analyze. You’ll want to measure new MRR (i.e. new customers), expansion MRR (customer who upgraded their plan), and churn MRR (revenue lost from customers canceling before their expected average customer lifespan).
MRR serves a similar function as a gross profit margin because it is a metric that is used for planning. If you report to a board of investors, this is an important KPI to track. “We kept a close track of each of our crucial metrics,” Aite explains. “We then made a case for ourselves in front of investors with a spreadsheet that showed how and why our product worked…Whoever is investing will want to know where their money is going – and this strategy will give you a compelling case.”
5. Customer acquisition cost
Without customers, you don’t have a business. “Our best business growth strategy tip is to focus on customer acquisition because this is where most companies have a leak in their funnel,” share Malte Scholz, CEO and co-founder of Airfocus. “The strategy we used was simple…we learned as much as we could about them and reach out in different methods – email, cold calling, social media outreach – whatever we could to get in touch.”
However, many companies are so focused on the “win” of closing a deal that they forget how much was spent to acquire the customer in the first place. Your customer acquisition cost (CAC) is calculated by dividing all costs spent on acquiring a new customer by the number of customers acquired in a specific time frame. Keeping a low CAC is critical to scaling your business.
CAC = Total customer acquisition expenses / # of customers acquired
CAC is often calculated alongside lifetime value (LTV), which refers to the total revenue a business can expect from a single customer. LTV is a strategic KPI to determine which customer segments are most valuable to a business.
Learn more about small business finances:
- Small business accounting: 5 steps to start your books
- How to cut down on busy work to meet your small business goals
- How to choose an accountant for your small business
- Translating accounting lingo for small business owners
- Small business survival toolkit
- Manage your small business: Tips and advice for common challenges
You can ensure that your thriving business is also a growing business by measuring the KPIs that are aligned to your business goals. By monitoring your KPIs regularly you can spot issues and correct them before they have a negative impact. Download our guide to small business finance for more accounting formulas you should know and an introduction to the trifecta of financial statements – the income statement, the balance sheet, and the cash flow statement.
A guide to small business finance
In this guide we'll walk you through the financial statements every small business owner should understand and explain the accounting formulas you should know.