Business Metrics

A metric that quantifies a business process

Written by CFI Team

What are Business Metrics?

Business metrics quantify a business process or characteristic of the performance of a business process. They track the performance of business processes in various areas, such as finance, marketing, human resources, information technology, operations, production, investment, and other areas.

Business Metrics

Business metrics can also be categorized as performance metrics, which measure the different aspects of performance for an organization or a project. Financial metrics include aspects of financial performance that track sales turnover, profits, expenditures, assets, liabilities, and capital. They are used by organizations in diverse industries to track business processes, improve operational efficiency, and assist in planning and strategy formulation.

A wide selection of metrics can be used to quantify different characteristics and measurements. It is also true for business metrics, which are far and wide and largely depend on the type of business. Hence, selecting the right business metrics suitable for a specific business organization will depend on the type of business, industry, and goals.

Below are business metrics classified by functional area:

Financial Metrics

1. Sales Revenue

Month-over-Month and/or Year-over-Year Comparison

Revenue is the essence of business; hence, its tracking is paramount to an organization. It is also a part of many business performance metrics. Incremental revenues from previous periods are desirable for business sustenance and profitability.

2. Gross Profit Margin (GPM)

(Gross Profit / Sales) x 100

Gross profit margin is a profitability measure as per the formula. It measures the efficiency of managing the cost of production in relation to sales. The wider the margin, the better. A comparison to industry benchmarks is the key to appropriate interpretation.

3. Net Profit Margin

(Net Profit / Sales) x 100

Net profit margin is another profitability tracker for measuring how each dollar of revenue earns in net profit. If there is a low margin, an upward adjustment is needed on selling prices, or costs need to be lowered.

4. Net Cash Flow

Revenue + Increase in Liquid Assets – Expenditures + Increase in Liabilities

Net cash flow is a measure of the difference between cash inflows and outflows. Cash flow needs depend on the type of business.

5. Working Capital

Current Assets – Current Liabilities

Working capital demonstrates the ability of a business to meet its short-term obligations. It is basically the ability to make payments to cover short-term obligations from short-term assets.

6. Debt-to-Equity Ratio

Total Liabilities / Shareholders’ Equity

The ratio measures the composition of debt and equity in a business capital structure. A ratio of more than 1 indicates that most of the capital comes from debt. The ratio indicates risks inherent in the capital structure.

7. Inventory Turnover

Cost of Goods Sold / Average Inventory

It measures the efficiency of inventory investment in generating sales during a specific period. It is a measure of how quickly the business can sell stocks. A higher ratio is preferable and shows greater efficiency.

8. Days Sales Outstanding (DSO)

(Average Account Receivables / Total Net Credit Sales) x 365

Day sales outstanding represents the collection efficiency of credit sales and measures the average number of days a company takes to collect cash from credit sales. The lower the number of days, the greater the collection efficiency of the business. It can be calculated monthly, quarterly, or annually.

9. Days Payables Outstanding (DPO)

(Average Account Payables / Cost of Goods Sold) x 365

Day Payables Outstanding calculates the average number of days a company takes to pay its suppliers. The greater the number of days, the longer a firm takes to pay suppliers and, in some cases, the higher the company’s bargaining power over suppliers. However, a higher ratio may be perceived as an inability to pay.

10. Current Ratio

Current Assets / Current Liabilities

The current ratio measures the liquidity state of the business, that is, its ability to meet short-term obligations as they fall due. Desirable ratios depend on industry-standard, but a ratio of more than 1 is an economy-wide benchmark.

Sales Metrics

1. Sales Win Rate

(No. of Sales Opportunities Won / No. of Sales Opportunities Contacted) x 100

The percentage of total sales opportunities converted into actual sales. It shows the aggressiveness of an organization’s sales team.

2. Sales Cycle

Days Spent on Sale Won / Total No. of Sales Opportunities

The sales cycle is the average time it takes to win a sale in terms of days or months.

3. Total Customers

Any business aims to increase its customer base by growing the number of customers.

4. Average Customer Revenue

Total Revenue / Total Customers

The ratio calculates the average revenue per customer, which can assist in crafting upselling strategies.

5. Customer Retention Rate

(Existing No. of Customers – No. of Customers at Beginning) / No. of Customers at Beginning

It measures the percentage of customers retained in the business out of the total customer base in a given period.

6. Customer Lifetime Value (CLV)

(Contribution Margin x Retention Rate) / (1 + Discount Rate – Retention Rate)

The customer lifetime value estimates the amount of revenue expected to be earned from a customer over the time they are customers of the business.

Marketing Metrics

1. Conversion Rate

The metric calculates the number of visitors to a company’s website that converts to customers by making a purchase and signing up to use a product. It is usually used by subscription-type businesses.

2. Incremental Sales Revenue

Total Sales – Expected Sales Without Marketing Campaign

The metric calculates sales generated from a specific marketing campaign. The metric tracks the performance of a marketing campaign in terms of sales generated.

3. Cost of Customer Acquisition

Money Spent on Customer Acquisition / Total No. of Customers Acquired

It measures the cost of acquiring one customer through a marketing effort.

4. Social Media Followers

The number of social media followers and their growth rate is a metric that marketers are keen to track. Social media followers engage with products frequently and talk about them, which increases brand awareness and, ultimately, sales.

5. Web Traffic Sources

The metric tracks website traffic sources to enable the company to formulate strategies for the most promising website source categories. Sources are varied and encompass social channels, emails, organic traffic, and so on.

Product Performance Metrics

1. Active Users

Daily Number of Active Users (DAU) Monthly Number of Active Users (MAU)

The metric represents the number of people who purchased a product or signed up for a subscription on a given day or month. A daily active user is active daily, and a monthly active user makes repeat visits within the month.

2. Daily Active Users/Monthly Active Users Ratio

DAU / MAU

The ratio measures customer product engagement by calculating product stickiness. It measures the proportion of monthly customers who engage with products daily. It is normally associated with digital products.

Human Resources Metrics

1. Employee Turnover Rate

No. of Workers Who Left / Total No. of Employees

The employee turnover rate is the rate at which employees leave employment voluntarily and is usually calculated annually. An industry benchmark will determine whether the rate is good or bad, but a higher rate points to low job satisfaction, which warrants an investigation to determine causes.

2. Absenteeism Rate

(Total Unplanned Leave / No. of Working Days) x 100

The metric refers to the rate of absenteeism at work. It does not include planned leave. It is important to pay attention to the absenteeism rate, as it affects the smooth running of daily business operations.

3. Cost Per Hire

(External Recruiting Expenses + Internal HR Expenses) / Successful Hires in a Given Period

The metric represents the total cost of hiring an employee. The cost includes posting job adverts, payment of recruiting agencies, and other related costs.

4. Revenue Per Employee

Total Revenue / Total Employees

The metric calculates the revenue earned by each employee. It is suitable for employees that work in teams. It can be used for staff performance analysis. Various measures are used to come up with the metric, depending on the specific entity.

More Resources

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