While being a business owner can be challenging and require you to spin multiple plates at once, it’s important to take a step back and analyse your performance once in a while to make sure you’re on track to where you want to be.
By tracking key metrics, businesses can gain valuable insights into their operations, make informed decisions, and achieve their strategic goals. But what should you be looking for? That’s the question we’ll be taking a look at today.
Revenue growth
Revenue is your total sales minus the cost of returned or undelivered items or services. It’s a key metric that every business should use to measure their financial performance. It goes without saying that the highest amount of revenue possible is ideal.
If you calculate your revenue for the previous few years (or keep your yearly revenue figures going forward), you can calculate your revenue growth rate, which will indicate whether your business is growing or stagnating.
You can also use your revenue to calculate your revenue per customer, which measures the average income generated from each customer. It’s calculated by dividing the total revenue generated by the number of customers. Measuring this will help you understand your customer value, optimise pricing strategies, and identify opportunities for upselling and cross-selling to boost overall profitability.
Gross profit (margin)
Your gross profit allows you to truly understand your business’s financial performance. It’s like your revenue but takes into account the costs of delivering a product or service. Your net profit is slightly different, taking into account your taxes, debt payments, and expenses.
However, since gross profit is a purely monetary value and not a percentage of your revenue, it can increase even when your performance declines. To truly understand your performance, it’s therefore better to measure your gross profit margin, which is your gross profit presented as a percentage. You can work this out by subtracting the cost of goods sold from your revenue and dividing it by your revenue.
Average fixed and variable costs
Fixed costs are the business’s costs that stay constant regardless of whether your business sells more or less of its product, such as your rent, utility bills, manufacturing equipment, small business loans and property tax. To determine how much your business will have to pay per unit of your product, you will need to know your average fixed costs, which is your total fixed costs divided by the total number of units produced.
Variable costs, on the other hand, are the cost of all the labour and materials used to produce a single unit of your product. To work out your average variable costs per unit, add each of your product’s variable costs together and divide them by the total number of units of products made.
Knowing these two figures is important because they allow you to accurately assess your business’s overall cost structure. This understanding helps you set appropriate pricing strategies, manage costs effectively, and make informed decisions about production levels and resource allocation.
Break-even point
While a high revenue and gross profit margin is desirable, preparing for lacklustre financial performance is important. Part of doing that is working out your break-even point, which is the minimum goal your business should aim for not to lose money during a specific period of time. If you go over your break-even point, it means you’re turning a profit.
To calculate your break-even point, add up all your fixed costs and divide them by your selling price per unit minus your average variable costs per unit. This and the other metrics we’ve discussed so far are a great place to start in your financial analysis.
Talk to us about your business and financial analysis.