If you’re a follower of professional sports, you know that it’s impossible to measure a player’s worth or capability to perform to a single metric. One statistic will give you a partial picture — and analytics is more complex than it seems. It’s only when you look at various metrics and statistics to see how a player can perform and evaluate their worth.
In the business world, the same concept applies to business. More than just one measurement to assess your financial performance is required. That’s far too restrictive. To gauge your company’s value, you must keep track of various metrics to complete how you achieve.
In this blog, we’ll discuss the seven most important metrics that each business must track that will allow you to assess the effectiveness of your company from a more comprehensive perspective and gauge your growth in various ways.
7 Important Metrics that Every Business Must Keep Track of
1. Revenue Growth
Revenue is the quantity you earn through selling your product, less the cost of returning or undeliverable products. It’s the most critical metric every company uses to assess the financial health of their business. Naturally, generating the most revenue is desirable, but the most reliable measure of your company’s financial performance is the year-over-year revenue growth.
Remember that your business’s position is different from the situation of your competitors, even though you compete for the same clients. It is, therefore, better to be competitive and compare your revenue and growth in revenue with your previous financial performance rather than comparing it with your competitors.
In other cases, you may make a revenue growth goal that needs to be attainable in your specific situation, which could cause you to fall short of your targets and force your employees to reduce their expenses to reach their targets. Eventually, you’ll burn everyone out.
2. Average Fixed Costs
Fixed costs are your company costs that are in place regardless of whether your business sells less or more of its products. For example, the cost of the rental of office space, hosting expenses and utility bills manufacturing equipment as well as small business loans, taxes on properties, as well as medical insurance all are fixed because no matter how much product you create or ship out to offer, the costs remain the same month after month.
To determine how much your business must pay for each product before considering the variable expenses required to produce them, it is necessary to determine your average fixed cost, the entire limited payment divided by the total quantity of units manufactured.
This will let you know the impact that the fixed costs you incur can have on your product’s chances to earn a profit and how much you need to spend on variable expenses to make profits.
3. Average Variable Costs
Variable costs represent all the work and materials required to make an item. Variable costs are directly based on the number of products you sell. Therefore, the greater the number of units you sell, the greater your variable costs. However, the fewer units you sell, the lower your variable cost.
A few examples of variable expenses are production equipment, physical materials sales commissions, employees’ salaries, credit card fees, online payment providers, and shipping and packaging costs.
To determine the total variable costs, your business must cover each product; you must decide on your variable expenses. To calculate this, you need to add all your unique variable costs and divide them by the total amount of units made.
4. Contribution Margin Ratio
A contribution margin calculation is based on subtracting variable expenses required to make an item from the income it brought in. Because your variable costs are directly related to the creation of your product, and your fixed cost is directly tied to the operation of your business. Running instead of producing your product, the contribution margin can help you determine how profitable your products are.
However, to fully comprehend their impact on your business’s bottom line, it’s best to calculate each product’s contribution margins. To calculate this, you need to subtract the total of each product’s cost of the variable from the sales revenue total and divide the result by the total sales revenue. The contributions margin will now be calculated in percentage.
When you’ve identified the contribution of each product’s margin ratios and, consequently, the potential profit they can generate and profit potential, you’ll know which items will yield more overall profit if you manufacture more significant quantities of them and which ones produce a less overall profit if you manufacture more significant portions of them. These knowledge-based insights will assist you in creating a mix of products with the highest profits for your company.
5. Break Even Point
The break-even threshold is the number of products you sell to ensure that your total earnings equal the total cost. Knowing your break-even point is essential since it is the most crucial goal your business must strive to meet to ensure that you don’t lose money within a particular time frame. In addition, if you can exceed your break-even mark, your business will earn a profit over that period.
To calculate your break-even point, take the fixed costs of all your business in a division of your contribution margin or the difference between your total sales revenues and the total variable costs.
For instance, if you sell baseball bats and your fixed expenses are $500,000, and the contribution margin is $50 per year, you’ll have to buy 10,000 baseball bats to achieve a profit. If you sell more bats, you’ll make a profit.
6. Price of the Goods sold
The cost for your business’s products is the price of purchasing or manufacturing the goods you sold over the timeframe above, including manufacturing, material, and labor expenses. That’s your costs of sales or the cost of operating.
Monitoring costs of selling goods, also known as COGS, is crucial since they directly impact your company’s bottom line. In the case of COGS, for instance, when COGS increases, your profits will drop. If your COGS fall, your earnings will increase.
To determine your COGS, choose the accounting method you prefer. Most businesses choose among three methods: First In, First Out (FIFO), Last In, Last Out (LIFO), and the Average Cost Method.
If you use this FIFO approach, you will have to sell the old products you bought or made initially. Prices rise with time, which is why the FIFO method lets you sell the cheapest inventory, which can reduce the COGS of your list and boost the profit you earn.
If you choose to use the LIFO technique, you’ll only sell the most recent products you bought or made first. Prices will likely increase as time passes, which is why the LIFO method allows you to sell the most expensive inventory. This increases the value of your COGS and lowers the profit you earn. However, the cost will be lower in taxes, which could help reduce or even eliminate the initial loss of profit.
If you choose to use an Average Cost Method, You’ll be able to calculate the cost per unit of your inventory, leaving out their manufacturing or purchase date. This stops the effects of inflationary periods from impacting the cost of your products sold.
7. Gross Profit Margin
Gross profit is determined by subtracting COGS from your revenue total and shows your business’s productivity or capacity to maximize your material manufacturing, labor, and costs. Since the gross profits are a dollar amount and not an amount of revenue, they can increase regardless of whether your financial performance is declining.
To fully comprehend your company’s financial performance, you should measure gross profit margin, which measures your gross profit in the percentage of your sales instead of your gross profit. If your margin of gross profits increases over time, it’s a positive sign that your business is in good condition.
