As a UK business owner, it is easy to assume you have a complete grasp of your company’s performance when you are the one overseeing everything. However, without closely following essential business metrics, there is a chance you could be missing crucial information.
Do not let the term “business metrics” intimidate you. In essence, it is a quantifiable measure used for tracking and assessing the status of a specific business process. It is often compared to a performance standard, such as a goal or a benchmark.
Metrics can be very industry-specific or even unique to a particular company. They might involve financial measures (like revenue, profit margin, or return on investment), customer-related measures (like customer satisfaction scores or Net Promoter Scores), and operational measures (like production efficiency or defect rates) among others.
The importance of business metrics
Business metrics serve as a health check for your business, offering insights into its overall performance. They enable you to make data-driven decisions, ensuring your strategies are effective and helping you pivot when necessary. They provide a clear picture of where you currently stand and help outline the path to where you want to be.
Are KPIs the same as business metrics?
No! All KPIs or key performance indicators are business metrics, but the converse is untrue. If this seems perplexing, consider “business metric” as an umbrella term that includes various ways to gauge a business’s performance.
On the other hand, as the name suggests, a KPI is a business metric deemed crucial enough to be trackable and relied upon for assessing your business’s success.
What are key metrics in a business plan?
There is no one-size-fits-all when determining the business metrics to track. The unique characteristics of your business dictate this. However, some key metrics are almost universally relevant and might unlock insightful aspects of your business performance. Here are a few:
1. Cash flow
Cash flow represents the net income your business receives over a particular period, offset by your expenses during that same period. This prevalent metric can offer a candid insight into your business well-being. Monitoring your cash flow can be achieved manually via a spreadsheet or effortlessly with small business accounting software like FreeAgent and QuickBooks, which automatically does it for you.
Maintaining a vigilant eye on your business expenses can lead to cost savings, minimisation of unnecessary expenditures, and ensure your business’ financial fitness. Periodic expense monitoring can also help identify trends and patterns, ensuring that your outlays aren’t tipping the financial scales adversely.
3. Customer Acquisition Cost (CAC)
CAC measures how much your business spends to acquire a new customer. This can be calculated by dividing the total cost spent on acquiring new customers (marketing expenses) by the number of customers acquired when the money was spent. It is a valuable metric to keep track of, as it helps you understand how cost-effective your marketing strategies are.
4. Lifetime Value (LTV)
Lifetime Value predicts the net profit attributed to the entire future relationship with a customer. It is essential to understand this metric as it can help you decide how much money you should be willing to spend on acquiring new customers and retaining existing ones.
5. Gross Profit Margin
This metric indicates the total sales revenue your company retains after incurring the direct costs of producing the goods and services sold. A higher gross profit margin indicates a more profitable company with better control over its costs than its competitors.
6. Net Promoter Score (NPS)
NPS is a measure of customer satisfaction and loyalty. It is calculated by asking customers how likely they are to recommend your company to others on a scale of 0-10. Tracking your NPS can give you insight into your customers’ overall satisfaction with your company and loyalty to your brand.
7. Return on Investment (ROI)
ROI measures the gain or loss generated on an investment relative to the money invested. It is used to evaluate the efficiency of an investment or compare the efficiency of many different investments. Monitoring your ROI can help you make informed decisions about where to allocate resources in the future.
8. Employee Engagement
It measures employees’ involvement, enthusiasm, and commitment to the workplace. High employee engagement leads to better productivity, improved customer satisfaction, and lower staff turnover. Surveys, feedback, and regular communication help measure and improve this metric.
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How to use business metrics
Understanding their importance and types is one thing, but how can you effectively utilise them? Here are some tips:
1. Set clear goals
You need to know what you want to achieve before you can measure it. Are you looking to increase revenue, reduce costs, improve customer satisfaction, or expand your customer base? Having clear goals will help you choose the right metrics to monitor.
2. Track regularly
Do not just measure your metrics once and forget about them. Regular tracking allows you to spot trends, monitor progress, and make adjustments as necessary.
3. Keep it relevant
Not all metrics will be relevant to your business. Choose ones that align with your business model, industry, and objectives.
4. Act on your insights
Metrics are pointless if you do not act on the insights they provide. Use them to inform your business decisions and strategies.
Do not let the fear of numbers or technical terms daunt you. Each business metric provides valuable insights, helping you uncover your business’s strengths, weaknesses, and hidden potential. Remember, no two businesses are identical; your company has a unique story.
Let the numbers narrate that story, guiding your strategy and decision-making process. Finally, it is worth noting that you do not have to be an expert in finance or data analysis to make the most of these metrics.
Many business owners prefer to focus on their expertise and leave the numbers to someone else. Working with a professional accountant like Bradleys Accountants can be invaluable. We can help you understand these metrics, explain what they mean for your business, and suggest strategies for improvement. Contact us to find out more.