What started as just a passion or hobby has evolved into a successful business. But does thriving equate to growth?
Depending on their objectives, various businesses will employ different methods for measuring growth. The effectiveness of a company’s expansion plan and the number of loyal consumers it attracts may both be measured by the company’s capacity to create repeat revenue from its goods.
Even though every business has its own distinct set of key performance indicators (KPIs), there are a few common KPIs that all small businesses should be aware of. In this article, we’ll look at:
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- Sales revenue
- Net profit and net profit margin
- Gross profit and gross margin
- Monthly recurring revenue
- Customer acquisition cost
Sales revenue
Revenue is the primary KPI used by most firms to evaluate success and market demand. The entire amount of money made from all client interactions is known as sales revenue. This money is deducted from any returns or uncompleted services to determine the total sales revenue.
Two other essential revenue KPIs are revenue per employee and revenue growth rates.
Looking at an employee’s revenue per employee allows you to gauge their productivity and value. This might help you decide whether to expand or contract your team size.
To compute revenue growth rates, measurable performance must be divided into time periods, such as a month, quarter, or year. For instance, a comparison of sales revenue between March 2019 and March 2020 might show market and customer demand changes. It can also reveal the reasons behind variations in growth.
Net profit and net profit margin
Costs fewer sales equal net profit. the selling price minus operational and other expenses minus interest Taxes
You should be mindful of your financial situation. Many small firms believe they are too small to be successful. Understanding your market’s potential and creating a business plan is vital for your price and business model to succeed.
Even though understanding your net profit is crucial, your net profit margin offers a more accurate picture of the state of your company’s finances. Your company’s net profit margin is the proportion of net profit generated by revenue.
Net profit margin = Net profit divided by Revenue
If you see that your margins are low or haven’t grown over time, you might need to raise your prices or reconsider how you market your goods or services in order to expand effectively.
Gross profit and gross margin
Net profit and gross profit are closely connected. Only the gross profit is computed after deducting the variable costs related to generating revenue.
Gross profit = Revenue minus Cost of Goods Sold
Gross profit margin (GPM) is a measure of how well a product or a collection of products performs in your company. By paying close attention to your gross profit margin, you can address any potential weaknesses in your company before they become problems.
Gross margin = Gross profit divided by Revenue
Monthly Recurring Revenue
One of the most crucial business metrics is monthly recurring revenue (MRR), especially if your company is subscription-based. You’re concentrating on client retention and lowering churn rather than one-time sales.
Testing your offering or service with a limited target market to ensure product-market fit before growing it to profitability is one of the most efficient company growth strategies. You will gain an understanding of some of the most crucial metrics, such as client lifetime value and customer acquisition cost.
While MRR may appear simple, there are a number of factors to take into account. Measurement of new MRR (i.e., new customers), expansion MRR (i.e., consumers who upgraded their plan), and churn MRR are all important (revenue lost from customers who cancelled their subscriptions).
MRR serves a similar purpose as a gross profit margin because it is a statistic utilized for planning. If you answer to an investor board, this KPI is crucial to monitor.
You will be able to make a compelling argument for potential investors once you’ve tested your product or service on smaller market size and have carefully monitored all of your critical data. Having a sufficient quantity of data that demonstrates the effectiveness of your product or service is essential, regardless of how tiny the market is, since customers will want to know exactly where their money is going and what it will be used for.
Customer acquisition cost
You can’t run a business if there are no clients. Because most businesses have a leak in this area of their funnel, concentrate on client acquisition. Then, reach out to them using any technique you have at your disposal – whether it be by email, cold calling, or social media – and explain how and why your product or service may benefit them.
On the other side, a lot of businesses forget how much money was spent initially to bring in the consumer because they are so focused on the “win” of closing a transaction. The cost of obtaining a new client is divided by the total number of new customers gained over a certain period of time to get the customer acquisition cost (CAC). In order to scale your firm, maintaining a low CAC is essential.
CAC = Total customer acquisition expenses divided by the number of customers acquired the term lifetime value (LTV), which refers to the total revenue a business might expect from a single client, is usually used in connection with CAC. LTV is a strategic KPI that businesses use to determine which client groups are the most lucrative.
Conclusion
You can make sure that your company is always expanding by routinely assessing the KPIs that are connected to your firm’s objectives. Additionally, you’ll be able to see problems and address them before they have a bad effect.