Your company has grown, and now you have several managers, each responsible for monitoring different aspects of the business. One way that managers do this is by using business metrics that capture measurable aspects of your company’s operations. Here is what you need to know about business metrics and how to choose the right metrics to track.
What are business metrics?
Business metrics are measurable metrics for critical business activities such as sales, expenses, online visitors, and customer service. You can use metrics to track processes. For example, a hardware manufacturer can track average unit production, and an online retailer can look at the rate of orders returned by customers. Then each of these business owners analyzes how these processes impact their business performance.
Why is tracking business metrics important?
Business metrics allow a company to analyze its various activities and processes, identify strengths and weaknesses, and make informed decisions about resource allocation. Key performance indicators (KPIs) are metrics for comparing a metric against a specific business measure or goal.
Metrics convey to employees, investors, creditors, suppliers, and stakeholders the business’s goals, performance, and even its corporate culture. They also help demonstrate compliance with government regulations, such as labor and environmental regulations.
Business metrics to track
Financial metrics
– Net income: refers to total revenue minus all expenses and taxes.
– Profit margin: expresses profit as a percentage of sales or revenue. It includes gross margin, operating margin, and net margin.
– Working capital: This metric measures business liquidity—its ability to cover current liabilities with current assets (cash and assets expected to turn into cash within a year).
– Accounts receivable turnover: Accounts receivable refers to the money owed by customers who have been extended credit, typically for 30 to 60 days. A high turnover ratio—total credit sales divided by accounts receivable—means the company is efficiently collecting from credit-paying customers.
– Accounts payable: Accounts payable refers to the money the business owes to suppliers and creditors. Delinquent accounts payable are tracked as a percentage of total accounts payable.
– Operating cash flow: Operating cash flow refers to the company’s net income plus non-cash expenses such as depreciation and amortization. The operating cash flow rate is used to measure the company’s ability to cover all its obligations from cash generated from operations.
– Burn rate: Startups or young companies that have not yet achieved profitability or are still developing their first product need cash from loans or equity financing to maintain operations. The burn rate measures how quickly this cash is being spent until it starts generating sales and profits, or until it needs additional cash funding.
Sales and revenue metrics
– Net revenue: The total amount of income generated from the sale of goods or services, minus customer returns or discounts.
– Sales growth: The increase in sales as a percentage compared to a previous time period.
– Average selling price: The average dollar amount for each sale or transaction. A higher average selling price can contribute to sales growth, even if the sales volume (number of units sold) decreases.
– Sales cycle duration: The time it takes for a customer to complete a purchase, from the initial decision to the finalized sale. The duration can vary depending on the product itself, its price, and the type of buyer.
– Leads and response and win times: A company’s sales team can track the number of new leads, known as prospects, and the average time it takes to contact a prospect after outreach. The company can also measure the win rate, the percentage of prospects that convert into sales.
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Goals
Goals are essential numerical objectives. For example, a company can set a goal of acquiring 100 new customers in the first quarter of its sales department.
Marketing Metrics
– Customer Acquisition Cost: This is the average cost of converting a potential customer into a client. The average is calculated based on the total sales and marketing costs of the company over a specific time period, divided by the number of new customers.
– Conversion Rate: This is the percentage of visitors who become customers after visiting the website.
– Customer Retention: This measures the customer retention rate, which is the number of customers who return over a specific time period.
– Customer Churn Rate: The churn rate is the percentage of customers who stop purchasing or terminate their subscriptions.
– Customer Lifetime Value: This calculates the profit a company can expect from a customer over the entire relationship.
– Marketing Return on Investment: This measures how profitable the company’s marketing team is by the amount of new sales that can be attributed to a marketing campaign.
Social Media Metrics
– Followers: These are the number of people who follow the company on social media platforms.
– Engagement: The percentage of followers who interact with your social media content through likes, shares, and comments.
– Impressions: The number of people who have seen a post on social media.
– Click-Through Rate: This represents the number of clicks on a link in a social media post.
– Account Reach: This tracks the number of people who viewed any of the company’s social media content over a specific time period. This number helps the company estimate the potential audience size for brand recognition.
Website and SEO Metrics
– Website Traffic: This is the number of visitors that come to your site over a specific timeframe, such as daily or weekly.
– Page Views: This is the number of times a web page is viewed. A company can use this to assess the popularity of specific pages and their content.
– Click-Through Rate: This is the percentage of internet users who click on a website after it appears in search results. A higher click-through rate indicates that the website titles and meta descriptions are appealing, and that selecting the right keywords is effective.
– Keyword Ranking in Search Engines: Search Engine Optimization (SEO) aims to improve the visibility of a website in online searches. Keyword ranking helps the company assess whether it is using the right words and phrases in its titles and texts to achieve the highest possible rank in search results.
E-commerce Metrics
– Average Order Value: This is the monetary value of customer orders over a specific time period, such as a month. To calculate it, divide the total monthly sales by the total number of orders. You can break it down further by product category.
– Best Sellers: A company can track individual products or product categories that receive the most orders.
– Cart Abandonment Rate: This is the percentage of online users who place a product or service in the cart but do not complete the checkout process.
– Return and Refund Rate: This is the percentage of sales that are returned by customers and the percentage of sales that are refunded.
Workforce and HR Metrics
– Revenue Per Employee: Revenue per employee is calculated by dividing the company’s total revenue over a specific time period by the number of employees. Different industries can have significantly different readings for this metric. It can also be applied to departments and teams within the company.
– Employee Retention Rate and Turnover Rate: The retention rate measures the average duration employees stay at the company; turnover rate tracks the percentage of employees who leave over a specific time period.
Cost of Hiring: The cost of hiring a new employee includes advertising the job, interviewing candidates, onboarding the new employee, and training. Use this metric for budgeting in human resources and evaluating hiring efforts.
Frequently Asked Questions about Business Metrics
Are business metrics the same as key performance indicators?
Metrics are used to track a wide range of business activities, while key performance indicators compare the metric against a target. For example, a 20% sales growth is a metric; sales growth that exceeds or falls short of the percentage target is a key performance indicator.
What is the best metric to evaluate a company?
Some metrics are universal, regardless of the type of business, such as sales, expenses, and profit. Others are more specialized to the type of business. For instance, a manufacturer may focus more on production metrics like raw material costs and labor costs, while an online retailer may target customer satisfaction metrics.
When should you track business metrics for your company?
Track metrics regularly according to their significant changes. For example, check the results of SEO updates every quarter (since it takes around three to six months to improve web traffic) and review average account revenue every month.
How do you choose which metrics to track?
Choosing trackable metrics depends on the type of business. A manufacturer might focus on production metrics like labor costs and raw material costs. An online retailer may be more interested in tracking best-selling products and customer satisfaction data.
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