Success is a word that can mean a lot of different things. On an individual level, it might mean completing your first marathon or losing 20 pounds. When it comes to businesses, success might mean record-high profits, reaching a customer milestone or even opening a new location to expand your business.
We provide our Addition Financial business owner members with an array of tools to help them achieve success. One topic that comes up frequently when we talk about members’ businesses is the issue of how to measure business success. With that in mind, here are eight financial metrics and KPIs to measure the success of your business.
What Are Success Metrics in Business?
Before we share the most important financial and success metrics to track, let’s talk about what success metrics are.
A business success metric is any metric that tells you whether you’re making progress toward a business goal. They can serve as a barometer to evaluate whether your business strategies are effective and help you make decisions about how to reallocate resources in the event your strategies aren’t delivering the desired results.
KPIs, or key performance indicators, are an example of success metrics. You can use them to do the following things:
- Measure employee performance
- Track production goals
- Measure your financial growth
- Keep an eye on your customer retention rate
- Measure your ROI
These are just a few examples of KPIs that could be used for measuring success.
Why is Measuring Business Success Metrics Important?
Tracking KPIs is essential for every business. You’re far more likely to be successful if you have trackable goals and the means to measure your progress. That’s what KPIs do.
Here are some of the most important benefits of tracking business success metrics:
- KPIs can help you identify strengths and weaknesses in your business strategy. If you’re implementing a strategy that isn’t working, tracking the right KPIs can help you avoid waste and reallocate your resources to a strategy that might be more effective. At the same time, metric tracking can help you pinpoint the strategies and tactics that are most effective and have the biggest impact on your ability to meet your goals.
- KPIs can be useful for setting business goals. To be useful, goals must be SMART (specific, measurable, attainable, realistic and time-bound). KPIs can be used to identify areas for growth and to create SMART goals that you can measure.
- KPIs make it easy to measure your progress in any area. There’s always a human element to business success, but measuring the right KPIs can help you see at a glance whether you’re making progress toward your goals – and how much progress you’re making.
- KPIs help to align departments and teams. When teams such as sales and marketing aren’t aligned, it can be difficult to meet your goals. KPIs can help you manage expenses and make it easy for departments to work together.
- KPIs can help you allocate resources (or advocate for more resources). Resource allocation is a challenge for every company. Tracking KPIs can help you pinpoint areas where more resources are needed or areas where you’re overspending. Either way, you can reallocate resources to make sure that everybody has what they need.
- KPIs can be used to incentivize employees. Providing your employees with incentives to meet individual and team goals can drive productivity up. When you’re tracking KPIs, you can set targets and provide team members with rewards to incentivize them to work efficiently and keep their eyes on the prize.
As you can see, tracking success metrics and KPIs can help you to pinpoint company goals, allocate resources properly and achieve success – whatever that means to you.
8 Financial Metrics & KPIs to Measure Your Success
Now that you understand what a key performance indicator is and how measuring them can help you, here are eight financial metrics and KPIs to track.
#1: Net Profit
Tracking your net profit is the best way to determine if your business is becoming more profitable year over year. It’s normal for businesses to experience dips in net profit due to unforeseen expenses or economic conditions.
You can calculate your net profit by subtracting your expenses from your revenue. It’s a simple KPI that you can use to monitor your success.
#2: Net Profit Margin
Your net profit margin shows you how much profit you’re earning relative to the revenue your business earns. Said another way, you can see how well you’re using your revenue to earn profits.
The formula to calculate your net profit margin is simple. Take your net profit and divide it by your revenue. If you had $300,000 in revenue and $100,000 in net profit, your net profit margin would be 33.33%.
#3: Liquidity Ratio
Your liquidity ratio is important because it lets you know what your liquid assets are and can help to determine whether your business needs an injection of cash from a lender or an investor to meet your short-term cash obligations.
You can calculate your liquidity ratio by taking your current assets and dividing them by your current liabilities. If you have a liquidity ratio of one or above, you have the cash on hand to meet your obligations.
#4: Conversion Rate
Your conversion rate measures how many prospective customers or clients turn into paying customers or clients. It can be measured in a variety of ways depending on the nature of your business or how you’re marketing it.
The basic formula involves taking the number of new customers and dividing it by the number of prospects. If you had 100 prospects and 10 of them became paying customers, you would have a conversion rate of 10%.
You can measure your conversion rate by looking at the percentage of people who click a call to action and the number of those people who make a purchase after clicking, or by tracking the number of people who buy from your online store versus the number who visit the store.
#5: Customer Acquisition Cost
Tracking customer acquisition cost is useful because it can help you determine whether your sales and marketing dollars are being wisely spent to grow your business. Ideally, you want your customer acquisition cost to be as low as possible.
You can calculate your customer acquisition cost by adding your sales and marketing expenses together and dividing that number by the number of new customers you’ve acquired. If you’re spending too much to acquire a new customer, you may need to revamp your strategies to reduce your costs.
#6: Churn Rate
Your churn rate measures the rate of customer attrition, or how many customers are leaving your business in a specified period. You can also measure employee churn.
You can calculate your customer churn rate by taking the number of customers lost in a period and dividing it by the total number of customers at the beginning of that period. An alternative is to divide the number of customers lost by the number of customers gained.
#7: Monthly Recurring Revenue
Any business that operates on a subscription basis or relies on recurring sales should track its monthly recurring revenue (MRR). This metric tells you how much monthly revenue you can expect to have and can be useful for financial planning.
You’ll need to calculate the average revenue per user (ARPU) and multiply it by the total number of monthly users (or recurring customers) to calculate your MRR.
#8: Customer Satisfaction Score
Measuring customer satisfaction is essential for growth because if your customers aren’t satisfied with your products or services, they are likely to leave you in favor of one of your competitors.
CSAT tracking requires more than a formula. You’ll need to ask your customers how they feel and use the data you collect. For many companies, the solution is asking customers to answer questions on a scale and use their responses to determine whether a customer is satisfied or not. Then, take the number of satisfied customers and divide it by the total number of customers to get your CSAT.
Business success may be measured in a variety of ways, but most companies want to see a combination of steady growth, increasing profits, effective spending and customer satisfaction to make sure they’re on the right track and in line to attain their goals. The 8 metrics and KPIs we’ve included here are a good place to start gathering the data you need.
Are you looking for business financial tools to help you achieve your goals? Addition Financial has what you need! Click here to read about our business services and schedule a meeting today.
Posted on Oct 27, 2022
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