Running a business comes with a slew of responsibilities. When managing day-to-day operations, it’s easy to get caught up in the minutiae and forget to step back and look at how your business is actually performing. The following business measurements can help you ensure you have a good gauge on how well your business is doing. These metrics will help you continue to do the things that are working – and make changes when you detect things that are not.
This ratio, expressed as a percentage, compares a company’s operating cash flow to incoming revenue. Essentially, this ratio represents a company’s abilities to turn the sales they make into usable cash – as a rule of thumb, the higher the percentage, the better.
A company’s gross profit is the total amount of revenue brought in minus the cost of the goods sold. A company’s gross profit is a good way to compare how well a company is doing versus its competitors.
Gross profit is not the only measurement that matters for a business’s profits. Businesses should also look at their profits (or losses) on a monthly basis, since they don’t just incur the costs to produce or acquire the goods they sell. Companies also have regular (usually monthly) expenses like mortgages, rent, utilities, salaries, and more.
Bringing in customers is essential; however, acquiring customers does cost the business something – usually, the money invested in sales and marketing. To calculate customer acquisition cost (CAC), take the total amount you spent on marketing, sales, promotions, etc. during a certain period, and divide it by the number of new customers you brought in during that same period.
A company’s inventory turnover measures how many times inventory is sold or used in a predetermined period. Essentially, your inventory turnover shows how well your company can move its goods. To calculate it, simply divide the total cost of your sold inventory by the amount remaining.
Your company’s overhead costs are what it spends on fixed costs not directly linked to producing or creating your services or goods. Overhead costs can be things like rent, salaries, office supplies, and more. Measuring overhead costs can help you plan an accurate budget and ensure that you’re generating enough revenue to cover all of your expenses.
The customer LTV is how much one customer is worth to your company over the entire period they choose to do business with you. To determine customer lifetime value, simply add together all of the gross profit brought to your company by an individual customer. You should ensure your LTV is higher than your CAC.
Your cash burn rate shows how quickly your company uses the cash it has (or earns). Your cash burn rate can show whether you’re spending too much (and too quickly), or whether you’re able to maintain a positive cash flow.
Customers come and go, and the measurement of losing customers is called churn. Your churn rate can be calculated by the number of customers you lost in a certain period by the number you started with at the beginning of that period. The lower the churn rate, the better.
Accounts payable are the debts a business owes at any time, and the accounts payable turnover measures the rate at which businesses pay for the things they owe. To calculate it, divide the total of supplier purchases by the average amount of accounts payable. This helps you determine if you can actually afford what you’re spending on your business – or whether you should cut back.
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