5 Business Metrics Every Entrepreneur Should Know and Use
Learn 5 different business metrics to gain more insight into your business and to make it grow. Every successful business is based on the numbers.
What are Business Metrics?
Business metrics measure the health and efficiency of a business. Business metrics are essential when building a successful company. Some metrics can be used to assess specific parts of your business model, while others are more powerful in calculating the health of the business for the future.
All 5 business metrics chosen below are easily calculated with the information you probably already have available.
1. Return on Investment (ROI)
ROI measures the efficiency of an investment. It can be used to compare different investments made into your business. It is a great way to indicate what is working and what isn’t. It is one of the most popular metrics to use because it has various uses in your daily operations.
You can use it to calculate the profitability of certain tasks and revenue models. Its simplicity also allows it to be easily calculated and understandable and by its nature easily compared against other types of investments.
Example from day-to-day operations: Using it to compare the efficiency of your marketing tools and campaigns. You will learn what you should invest in more.
While being a great tool, it bears some limitations that should not be overlooked. Use caution when forming your calculations because it can be easily manipulated to suit different needs. Always have an accurate ROI to represent the reality of your business. Evaluate the bigger picture.
Return on advertising spend, also called ROAS, is used to calculate the ROI of advertising.
2. Gross Profit
Gross profit is one of the most important metrics that an entrepreneur definitely should know. It is one of those figures that are crucial to running your business on a day-to-day basis.
Gross margin is one of three profit margins, others being operating profit and net income. Operating profit takes into account all of the expenses that you need to run your business. Net income is the bottom line taking into account everything such, as debt payments and secondary incomes.
Gross margin is the easiest to calculate hence has more use cases in everyday life. Use it to calculate and compare the profitability of products.
Gross margin is revenue deducting the cost of production divided by revenue.
Using the different profit margins shows you any possible underlying issues and weaknesses in your operations. They also make it easy to compare your performance on any given time frame. By reevaluating your profit margins from time to time, you will have a better understanding of your company’s processes and how to make them better.
Gross margin is a great way to calculate your effectiveness against the competition. It tells you if the pricing strategy is right or not and the current situation of your operation. It also tells you rather quickly whether your overall margin can support the other expenses of your business.
3. Burn Rate
Burn rate is essential if a company is operating with venture capital or loans or any other means of funding other than financing your company through generating revenues. It could be an indicator to start investing more in sales.
Burn rate measures negative cash flow. Burn rate is used to tell when you will run out of money hence advising when will you need to source additional funding for your business. The Burn rate acts as a guide to help you keep your operations afloat.
Burn rate is quoted by how much cash is used in a month. A burn rate of 5.000 means that you’re spending 5.000$/month.
Calculate it by adding all your monthly costs. Divide your funding with the costs, and you will know how many months you have left.
4. Current Ratio
The current ratio is used to test a company’s liquidity and working capital. The current ratio is the company’s current assets divided by its liabilities.
Calculating the current ratio, you will see if your company is readily available to pay its short term liabilities like taxes, debts, and expenses. The goal is to achieve the highest current ratio as possible.
A business should keep its current ratio over 1. A current ratio below 1 means that more working capital is required to improve a companies health.
When the ratio is too high, then there is too much cash available, and it should be invested for long-term growth.
The most important thing that the current ratio will tell you is that you can pay for everything you need to pay with the working capital at hand.
Current Ratio is measured by dividing current assets with current liabilities.
5. Cost of Acquisition and Lifetime Value
These two metrics answer the following: How much do you make per customer or lead during its lifetime? How much does it cost to acquire a customer?
Knowing your LTV and CAC of your customer is a piece of the crucial information you can obtain.
Calculate your cost of acquisition by adding up your marketing and sales costs and dividing it by the number of customers achieved.
There are multiple ways to calculate lifetime value. In its most simple way, track all the profits generated by a customer in a single time frame you have chosen and deduct the cost of acquisition. By adding variables, you can make a more detailed version of LTV.
The more you know about your customers’ behavior, the more accurate calculations will be. One other way to calculate the LTV is average order times repeat transaction times average customership length in months or years.
Knowing your LTV and CAC from early on gives you the advantage of reacting to it fast. A low LTV might indicate low repeat orders.
For example, you can tackle it by improving your customer relationships, and customer support, providing additional products for your customers to enjoy or through retargeting advertising to ensure those who have bought will buy again.
Remember that LTV and CAC are measured in money therefore, their values depend on the nature of your business.
Bonus metrics: Web Analytics
The importance of web-analytics can’t be argued in the digital era. Every online business should have a basic understanding of web analytics.
All of the financial metrics above have different usages. Others are better in the day-to-day management to calculate various aspects of your daily business, while others can be used to have a better understanding of how your business is going to flourish in the future.
In the end, the business metrics complement each other’s ability to make you more knowledgeable. The more you know about the finances and operations of your venture, the chances of succeeding in your goals are improved.
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