What started out as a passion or hobby is now a thriving business. But is thriving the same as growing?
Depending on an organisation’s objectives, measuring growth will differ from one company to the next. The amount of repeat customers a company can produce from its products can be used to gauge how effective its growth strategy is and how many loyal customers it is acquiring.
While each company has its own set of key performance indicators (KPIs), there are some common KPIs that every small business should be aware of. In this article, we’ll look at:
- 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
Most firms use revenue as the initial KPI to determine success and market demand. The income generated from all client purchases is referred to as sales revenue. Returns or undelivered services are subtracted from this income to get the final sales revenue result.
Other important revenue KPIs 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 customer demand, and may also provide insight into the reasons behind growth fluctuations.
Net profit and net profit margin
Unfortunately, your net profit – or take-home pay – is not equal to your sales income. After all expenses, like cost of goods sold, operational expenses, and debt, have been accounted for, net profit, also known as the bottom line or net income, is the amount left over.
Net profit = Revenue minus The cost of goods sold minus Operating and other expenses minus Interest minus Taxes
You should be aware of your numbers. Many small firms believe they are too small to succeed. It’s critical to recognise your market potential and develop your business model to ensure that your price and business model are feasible.
While knowing your net profit is important, your net profit margin is a stronger indicator of the financial health of your business. The percentage of net profit created by your company’s revenue is your net profit margin.
Net profit margin = Net profit divided by Revenue
If you notice that your margins are small or haven’t improved over time, you may need to boost your prices or rethink how you promote your product or service to grow appropriately.
Gross profit and gross margin
Gross profit is closely related to net profit. The variable expenses associated with generating revenue are only taken into account when calculating gross profit.
Gross profit = Revenue minus Cost of Goods Sold
Gross profit margin (GPM) is a metric that indicates how well a product or a group of items performs in your business. You can fix any potential weakness in your business before it becomes an issue by keeping an eye on your gross profit margin.
Gross margin = Gross profit divided by Revenue
Monthly recurring revenue
Monthly recurring revenue (MRR) is one of the most important business indicators, especially if you run a subscription-based firm. Instead of focusing on one-time sales, you’re focusing on customer retention and reducing churn.
One of the most effective business growth tactics is to test your product or service with a small target market to confirm product-market fit before scaling it to profitability. This will give you insight into some of the most important indicators, including customer acquisition cost and lifetime value.
While MRR might seem straightforward, there are several variables to consider. You’ll want to measure new MRR (i.e., new customers), expansion MRR (customers who upgraded their plan), and churn MRR (revenue lost from customers who cancelled their subscriptions).
Because it is a statistic used for planning, MRR performs a similar function as a gross profit margin. This is a critical KPI to track if you report to a board of investors.
Once you’ve tested your product or service on a smaller market size and have closely tracked all of your key metrics, you’ll be able to put together a strong case for potential investors. Because they’ll will want to know exactly where their money is going, and what it will be used for, having a good amount of data that proves that your product or service works – no matter how small the market size – is crucial.
Customer acquisition cost
Without customers, you don’t have a business. Focus on customer acquisition because this is where most companies have a leak in their funnel. Learn as much as you can about potential customers and then reach out using any methods available – whether that be through email, cold calling, or social media – and show them how your product or service can work for them and why they need it.
Many companies, on the other hand, are so focused on the “win” of closing a sale that they forget how much money was spent to acquire the customer in the first place. 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 timeframe. Keeping a low CAC is critical to scaling your business.
CAC = Total customer acquisition expenses divided by the number of customers acquired
CAC is frequently used in conjunction with lifetime value (LTV), which is the entire revenue a company can expect from a single customer. LTV is a strategic KPI used to assess which customer segments are the most profitable to a business.
By constantly evaluating the KPIs that are tied to your business’s goals, you can ensure that your company is always growing. You’ll also be able to identify issues and correct them before they have a negative impact.
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