With 99% of US businesses classified as a small business, there is no doubt that they are the backbone of the U.S. economy. US laws provide a low barrier of entry for entrepreneurs to cultivate startups across the nation. It can be said that starting a business in America is easy but creating an entity that turns a profit and grows is not. Creating and running such a successful business requires the tracking of key business metrics. Some of the most important business metrics or KPIs (key performance indicators) to track include Sales Revenue, Net Profit Margin, Gross Margin, Customer Loyalty, and Employee Happiness. This is not a fully inclusive list of key metrics, but they are universally important to any small business with the desire to grow.
5 Key Business Metrics: The Money Side
“Sales” and “Revenue” are interchangeable terms that both have to do with total income received. Sales revenue is calculated by totaling client purchases and subtracting costs due to returned or undeliverable products. This equals the amount realized by a business from the sale of goods or services and is used to define the size of your business. Tracking this information is key to record every month, quarter, or year to track growth and trends of your business. Sales revenue is often compared to net profits in order to see what percentage of sales revenue that is being converted into profits. Sales Revenue is the starting point for arriving at net income because it is the income a company generates before any expenses.
2. Net Profit Margin
This metric is the percentage of revenue left after all expenses have been deducted from sales. This business metric is effective at showing you how your companies’ ability to generate profit compares to its revenue. This number will tell you how each dollar earned translates into profits. A high net profit margin indicates your business overall is successful. This level of success derives from the fact that you are exercising good cost control and your goods or services are priced correctly. A high net profit margin is different for each industry, but you can generally aim for a goal of greater than 10%. You can improve your company’s Net Profit Margin by increasing revenue. There are many ways to do this, but a common strategy is by raising prices of goods or services and selling more. Alternatively, you can lower costs while keeping up with competition.
3. Gross Margin Business Metric
Gross margin is your company’s net sales minus its cost of goods sold. Cost of goods sold are the direct costs associated with producing the goods it sells and the services it provides. This business metric means that the sales revenue minus cost of goods sold gives you the capital your company keeps on each dollar of sales. These retained earnings can be used to pay costs, debts or used to pay shareholders. Also referred to as gross profit margin, gross margin is the total profit before expenses such as selling, general and administrative. Gross profit margin shows analysts whether a company can increase selling prices when costs are increasing or when competitors reduce prices or expend sales efforts. Profit margin can also be used on individual products or services to show how successful they are, or which products or services should be phased out.
Business Metrics with staff and clients:
4. How to Measure Customer Loyalty
Most successful businesses understand that repeat customers are their best asset. Loyal customers provide free marketing by sharing their experiences with friends and family and leave glowing reviews for potential clients on the hunt. A common method of tracking this is through a retention rate calculation. Retention rate is calculated by dividing the number of customers at the end of a period less new customers that period by the total number of customers at the start of the period. This calculation shows the number of clients who use your product or service over an extended period of time. Each industry will have a different standard of a high retention rate, so it is important to find yours and compare it to your competitor’s retention rate. Increasing customer loyalty is as simple as providing outstanding customer service and delivering high quality goods or services.
5. Employee Happiness
It’s common for sole proprietors to start small with low overhead and no employees. You may be in a situation where you don’t currently have any employees but are working hard to turn a profit large enough to justify making your first hire. Hard working employees are key to growing a business, and with happy employees comes higher production. This can be a very difficult but important business metric measurable as happiness is subjective. There has been significant research and efforts put into generating happy, healthy and productive workers. Some tools that will be helpful for measuring employee happiness include surveys and other HR tools that collect feedback on team and individual employee satisfaction. Whatever your industry, employees typically are more satisfied when they are provided with freebies or “perks”. Providing your employees with a comfortable space, snacks, and free copy are all examples of ways to motivate office employees. It’s commonly said that you don’t quit a job, you quit a boss, so be the type of boss you would enjoy working for.
Extra Business Metric Bonus: Entrepreneurial Operating System (EOS)
There are many other factors that are important to your specific industry that should absolutely be measured and improved upon. Many business owners lack the time or discipline to work on these measurables, or to even know how they compare to competitors. Understanding where your business stands is the first step to setting and eventually reaching your goals. Molen & Associates runs on the Entrepreneurial Operating System, or EOS. EOS is a set of simple concepts and tools that helps entrepreneurs get what they want from their business. This model provides a step by step process guided by our personal Professional EOS Implementer, Lesa Skipper.
Over the last 40 years, we have refined our processes and systems to more effectively help business owners like you. Each time we sit with a new business owner, we dig a little deeper and delve into the secret habits of successful businesses. At Molen & Associates, we are education focused and want you to be able to benefit from the tips and tricks we have picked up over the years. During our “Needs Analysis” consultations, we walk step-by-step with you to find areas to focus on for optimal business growth. These steps include: Foundation, Record, Analyze, Comply, Forecast, Breakthrough. You can read more about our Molen Model for business mastery here: https://molentax.com/our-process/molen-model-for-business-mastery/