There are a few measurements in life you always keep an eye on. The level of gas in your car. The temperature outside. The amount of coffee left in the cabinet. Knowing these measurements helps you keep your life running smoothly; you’ll never run out of gas unexpectedly, get caught in a cold front without a coat or be forced to spend the morning as a caffeine-free zombie.
In the same way, your business also has a number of important metrics known as KPIs—key performance indicators—that gauge the health and financial position of the company.
Now, if you tried, you could probably come up with hundreds of business metrics to measure, but most of them won’t tell you a whole lot about your business or don’t accurately show the big picture. Tracking irrelevant ones will only distract you from what’s important and will add unnecessary stress to your life.
Focusing on a handful of important KPIs, on the other hand, will help you keep a handle on the health of your company and make improvements over time. Here are 8 of the most important business metrics every entrepreneur should be monitoring on a regular basis.
Also called sales, sales revenue, and net revenue. First and foremost, how much money is coming in the door? This is the starting point for measuring so many other KPIs in your business, and in the simplest form it’s calculated by multiplying the number of units sold by the selling price. If you don’t know what your revenue is, you’re in big trouble!
It’s important to look at revenue not just from the current point in time, but as a dynamic number. How has revenue changed from month to month? Last year to this year? Trends in revenue growth or losses can tell you a lot about the direction your business is heading.
It’s also necessary to consider external factors, like changes in the market, competition, and marketing campaigns, when measuring revenue.
2. Gross Margin
How much money do you get to keep from each product or service sold? That proportion is your gross margin. It’s calculated by diving your gross revenue—what’s left over after paying for the cost of goods sold—by you’re the figure from number 1 above, your overall revenue. It’s measured as a percentage rather than a dollar figure.
So, if you sold 100 widgets this month at $10 each, your net revenue would be $1,000.
If those widgets each cost you $6 to make, your cost of goods sold is $600, and your gross revenue is $400. Your gross margin would be $400/$1000, or 40%.
This number provides even more insight than revenue alone because it tells you how efficiently your company is running. It should remain constant or decrease over time. If it’s going up, that means your product or service is costing more to sell and you’re actually making less money even if your prices and your customer base haven’t changed.
Keep an eye on your gross margin and improve it when possible by optimizing your production processes and trimming excess costs.
3. Cash Flow
We talk about cash flow a lot here at Ignite Spot. It’s one of our favorite business metrics because cash is the lifeblood of your business. If you run out of cash, your business dies (unless you go into debt, and that’s a whole different topic to worry about).
Cash flow measures the amount of money coming into the business each month—which includes customers paying at the point of sale and paying on their accounts receivable—and the amount of money going out—salaries, rent, inventory, etc.
What you’re left with is the amount of cash on hand. If you were to “cash out” of your business tomorrow, how much cash would there actually be? If your cash flow is negative, it’s a big red flag.
Cash flow is a funny thing because it’s different than profits. Let’s use the same example above and say you sold 100 widgets at $10 apiece, and they each cost you $6 to make. In accounting terms, you made a profit of $400.
But what if half of those customers bought their widgets on credit, opting to get their product now but actually pay for it later? That’s $500 you don’t physically have yet. So while your profit is technically $400, your cash flow would actually be negative $100 for that month, since you spent $600 to make the widgets but only had $500 in cash come in.
See why this number is so important?
We value it so highly that we created a free tool to help you calculate your cash flow. It’s our most popular feature on the site and you can download it right now here.
4. Cost Per Acquisition
CPA for shot, your cost per acquisition is the amount of money it costs you to win each new customer. Have you ever sat down and measured it before? If not, you could be wasting a ton of money on operating and marketing expenses that aren’t really doing anything for your business.
To calculate your CPA, you’ll need to take a few measurements over a set time frame. A quarter is usually a good place to start.
During that time frame, measure everything you spent on sales and marketing: marketing and sales salaries, advertising, Facebook and PPC ads, and anything else you paid for in an effort to drum up business. Then, measure the number of new customers that spent money with you during that time.
Divide the first number by the second number; that’s your CPA.
Your CPA works in conjunction with another business metric, Lifetime Value (which we’ll talk about next) to tell you whether your business is sustainable in the long run.
5. Lifetime Value
The Lifetime Value, or LTV, of your customer is exactly what it sounds like. From the first to the last dollar a customer spends with you, how much are they worth? This might sound like it’s something that would be impossible to figure out, but it’s why keeping good records is so important. If you’ve been tracking and managing your customer base for many years, then it’s easy to see how much the average customer spends with you over time.
The lifetime value will be a dollar figure, like $1,000 or $10,000, but it means little on its own. The insight comes when you compare LTV to CPA. How much are you spending to gain a customer, and how much will they spend with you over time? Obviously, you want the difference to be positive.
$100 might sound like a lot to spend to get someone to come to your website or show up at your door, but it’s peanuts if they wind up spending $2,500 with you in the long run. That’s a lifetime ROI of 2400%!
On the other hand, if your average customer makes a one-time purchase of $50 and never comes back, $100 is way too much to spend to attract them. It’s not sustainable in the long run.
Finding a healthy CPA to LTV ratio is key to scaling. Once you’ve found a balance that works, growing your business is simply a matter of investing more capital into attracting new customers, who will pay you back exponentially over many years.
6. Website Traffic
The importance of your website traffic will vary based on the type of business you run. For example, if you sell a product online, your website traffic is a hugely important business metric. If you run a brick and mortar store and don’t sell online, it may be less important.
In any case, though, it’s something you need to monitor. The days of not worrying about your website traffic are long gone. Even if you don’t physically sell anything online, the internet is where people turn before they make a buying decision, from shoes to plumbers and everything in between, so it’s important to have a website that’s functional and attractive to visitors.
Keep an eye on your website traffic using a business tool like Google Analytics. Ideally, you want traffic to be increasing each month or at least remaining steady. If you notice a sudden downturn, you’ll want to take an audit of your website or work with a digital marketing professional to determine the reason.
7. Traffic to Leads
Of all the people who visit your website, how many of them turn into leads? We’re willing to bet your website has a contact us form or a phone number for visitors to call, at the very least. How many people take one of these actions after visiting your site? Your traffic to leads ratio is measured by dividing this number by the metric above, overall website traffic.
This business metric is important because it tells you a lot about the public perception of your business and the effectiveness of your website. If 5,000 people visit your website each month but you only get two phone calls from online visitors, there’s a huge problem. You’re letting countless sales slip right through your fingers! It might be an indication that your website is hard to navigate or that you’re not communicating your value clearly.
Traffic to leads is a number you want to consistently improve to make sure you’re getting the absolute maximum value from your website.
8. Leads to Customers
Finally, out of those leads that come into your system, how many of them turn into actual customers? This is an indicator of the effectiveness of your sales team and your marketing activities.
If you’re seeing a decent number of leads but a low conversion rate into customers, there’s room for improvement in your sales funnel. Once again, it’s about maximizing every potential revenue opportunity. If you’ve got a warm lead in your had that you’ve worked hard to attract, you want to convert them into a customer at the highest possible rate!
A Word About Metrics
When we talk about metrics, the first thing people always ask is “what’s a good number to strive for?” The thing is, all of the metrics we’ve talked about here will vary wildly based on industry, business size, business age, seasonal versus non-seasonal, and so many other factors.
It’s normal for a new business, for example, to have a lower cash flow than a business that’s been operating for a few years. Likewise, the CPA for a business that t-shirts is going to be much lower than a luxury car dealership.
It’s impossible to give a one-size-fits-all answer. One of the first things we do when you become an Ignite Spot client is to take an audit of your business metrics to get a profile of your overall financial health. Then, we work with you on a one-on-one basis to find areas for improvement.
Thinking of hiring us? Awesome! Watch our getting started videos to learn more about becoming an Ignite Spot customer and getting on the path to better financial health.