Business Performance Metrics show how a business is doing through quantified real-world data. Otherwise known as Key Performances Indicators (KPI), these dynamics help to assess potential risks and scope for alterations. The indicators provide a mechanism to keep operations aligned with goals by monitoring and evaluating business processes.
Business metrics are required to avoid potential losses and have a proper insight about a particular business. Many metrics are used to evaluate any business, but choosing the most relevant ones is crucial if you don’t want to waste time. Though there are no concrete set of indicators, following are some of the most important.
1. Cash Flow
Cash flow is basically how much cash enters and exits a business. When cash is spent, it is known as negative cash flow and when cash comes into the business, it is known as positive cash flow. Cash flow does not indicate profit, rather it indicates business health. Cash flow indicates how much cash is required to pay off purchases, operational expenses, debt and wages. Cash flow analysis should be carried out at small intervals to avoid overspending and to correctly assess the business’s ability to cover future expenses. This metric is usually used to determine value of a business.
2. Inventory Turnover
Idle inventory is vulnerable to falling prices and is subjected to diminishing rate of returns over time. This is why it is necessary to keep inventory turning. Inventory turnover shows the frequency of sale and replacement of a company’s inventory over a particular period. It also provides information regarding days required to sell a particular product. In a nutshell, inventory turnover analyses how fast a company is selling their goods or services in comparison to industry averages. Low turnover indicates inadequate sales and hence excess inventory. Whereas a higher ratio indicates adequate sales or huge discounts.
3. Net Profit Margin
This metric indicates the efficiency of a company in terms of profit generation compared against its revenue. it shows how each dollar spent turns into profit. Efficient spending results in more profit. The analysis also helps to determine if income is exceeded by costs. This metric can be easily calculated by deducting expenses from monthly revenue. Net profit margins can be improved by simply increasing revenue. to do so, you can lower production costs or raise selling price. Either of these tactics requires thorough market research and steady business strategy.
4. Customer Acquisition Cost
Building a customer base and retaining their interest requires focused marketing strategies and smart investments. Customer acquisition cost is calculated by dividing marketing costs with the number of customers acquired in a particular time frame. It is also important to calculate customer lifetime value. If the average worth of customers is more than their acquisition cost, then it is a profitable scenario. Analysing this metric gives a better insight into the sales which bring higher profit and helps to focus on the audience which holds more rewards.
5. Sales Revenue
Sales revenue can be calculated by deducting the cost of undelivered or returned goods from the income generated through selling goods and services. This data can help to determine the validity of ongoing strategies and marketing efforts. Sales revenue depend on different factors such as competitive actions, changing trends of the market, former marketing campaigns etc. sales revenue can be increased through the expansion of market endeavours, making discount offers or hiring experienced sales personnel.
6. Interest Rate Coverage
Interest rate coverage indicates how comfortably can a company pay their interest on outstanding debt. It is calculated by summing up a company’s earnings before interest and taxes and dividing it by the company’s interest overhead for a particular period. This is a margin of safety for creditors of a company. If the company requires financial aid down the road, then money lenders (usually banks) review their interest rate coverage before sanctioning a loan.
7. Lead-To-Client Conversion Rate
Leads are potential customers, when acquired, they increase chances of making a profit. Proper sales funnel optimisation is required for achieving a higher rate of conversion. On the other hand, lead generation should be focused on the right audience who are qualified to become leads. You also need to continue to cater to the relationships to retain customer loyalty and ensure recurring purchases. It costs more to acquire a customer than to retain one.
Business Performance Metrics are necessary to properly assess your business’s future. You can accurately monitor the operational integrity and take calculative measures to avoid losses. These metrics also give your business credibility the the eyes of investors and creditors. Having a firm grasp on all these metrics will definitely help you improve your business.