Great product + great customers = great sales. These may be elements of a successful business, but they don’t always add up to a great bottom line. The equation for a profitable business involves the sum of several reporting metrics. Check out our handy list of common business reporting metrics and determine which makes sense to include in your algorithm for success.
bottom line – This can be a misused term, so it’s important to understand what it involves. It generally refers to “net income” or “net profit.” The term gets its name because it’s the figure that appears at the bottom of your income statement. It’s calculated by subtracting total expenses from total revenue. To impact the “bottom line,” businesses tend to grow sales revenue or increase efficiency by reducing cost. Watch this video to learn more.
customer acquisition costs – How much does it cost you to obtain a new customer? The lower the cost, the more revenue you can earn on a sale. This metric closely relates to your marketing efforts and can be used to measure their effectiveness. It’s calculated by dividing total acquisition costs by the total number of new customers over a given period. Take a look at these calculation examples. You would expect acquisition costs to decrease as your business becomes better known.
customer loyalty – It’s great when customers keep coming back for more. That means you’re spreading your acquisition costs out over multiple sales, so it’s important to have a regular process to monitor loyalty. Customer surveys are one way to measure it. Another is to examine purchase data such as frequency and amount of repeat sales. Here are some tips to increase customer loyalty.
gross margin – This is a percentage that tells how much a business retains from each dollar of sales. The greater the percent, the more money a business has for meeting costs and paying debt. Calculate gross margin by subtracting the cost of goods sold from total sales revenue, and divide that by total sales revenue. A margin below 60 percent can mean that a business may have difficulty growing. Typically, improving operating productivity can help to increase the percentage.
operating productivity – This is the ratio between an input used to run a business (like staffing costs or money) and the output gained from the business (like revenue or customer loyalty). Often it’s used to calculate staff productivity, in which case, input is the “hours worked” and the output is revenue. But it can also be used to measure manufacturing efficiency where input might be the cost of raw materials and the output is the number of units produced. With this feedback, you might adjust your inputs to see if it impacts the outcome. Here are examples of some possible adjustments.
overhead costs – These are fixed costs like rent, property taxes and insurance. Since they aren’t related to how much you grow, it’s important to monitor them separately. To manage these costs, business owners can look for lower-cost alternatives. For example, can you find less expensive office space? Some businesses reduce overhead by sharing office space and operational expenses like copiers and maintenance supplies.
sales revenue – This is not the amount you collect when you make a sale. It’s the income you get from a sale minus any cost from returned or undeliverable merchandise. Some use the term “net sales” or “net revenue.” It’s a major factor in how much cash you have available. A positive trend might mean you have room to reduce debt or expand. A negative trend could mean you need to reduce shrinkage, lower expenses or increase efficiency.
It’s critical for businesses to track key performance indicators with metrics like these. Each gives you another piece of information so you can adjust as needed and calculate your way to success.