How is your business doing? There are many ways to answer that question and, in this report, we’ll focus on the quantifiable answers. These come in the form of financial measures or metrics, sometimes called key performance indicators (KPIs). Many come in the form of ratios, so you also might hear the term financial ratios.
Whatever name you want to use, these numbers will help you track your company’s financial performance. One goal for tracking is to see if your business is improving or declining over time. Another goal might be to set specific numbers that you want to reach.
We’ll take a look at measures in these diverse categories:
- Cash Flow, Debt, and Liquidity
- Growth, Sales, and Marketing
- Production and Operations
- Expense Control
- Corporate Responsibility
- Traditional: Financial and Profitability
Not all of the measures below will be relevant to your type of business or the industry your business is in. However, you should be able to find some metrics that make you think, “I’d like to know that one.” As you read through this report, make a list of the ones that you feel would be valuable for you.
Measures for Cash Flow, Debt, and Liquidity
- Cash in bank
This is simply your cash balance as of any date you choose.
- Days sales outstanding (DSO)
DSO is relevant if you have a balance in accounts receivable, which happens if you provide people with goods or services before they pay you for them. It is a measure of how long it takes to collect money owed to you. The formula is:
Average Accounts Receivable / Revenue * Number of Days
First, decide on a time frame, such as one month. Let’s take June as our example. To get average accounts receivable, add the June 1 accounts receivable balance to the June 30 accounts receivable balance and divide the sum by 2. Use June revenue and plug in 30 as your number of days.
Improving collections and changing your invoice terms are actions you can take to lower DSO and improve your cash flow.
- Current ratio
The formula for current ratio requires two balance sheet numbers:
Current Assets / Current Liabilities
It measures your business’s short-term liquidity, or its ability to pay its short-term debts. Short term is defined as one year. If you’re looking to lower your debt, this is a good metric to track.
- Quick ratio
Quick ratio is most relevant for businesses with inventory. Its formula is:
Current Assets – Inventory / Current Liabilities
It’s a more specific liquidity metric than the current ratio, as it measures a company’s ability to pay its debt obligations without having to sell inventory.
- Working capital
Another measure of operating liquidity:
Current Assets – Current Liabilities
- Operating cash flow
Operating cash flow comes from the cash flow financial statement. The formula is:
Operating Income + Depreciation – Taxes + Change in Working Capital
It’s a measure of efficiency.
- Accounts receivable turnover
This metric measures asset efficiency, namely how effective a company is with credit and collections.
(Credit Sales – Returns and Allowances) / Average Accounts Receivable
- Accounts payable turnover
This metric measures efficiency with vendor payments and credit extended to the company.
Purchases / Average Accounts Payable
- Debt to equity ratio
Banks will be interested in this number that measures debt capacity. It comes from two balance sheet amounts and compares how much financing comes from lenders versus investors.
Total Liabilities / Total Equity
- Debt to total assets
This is another measure of financial leverage. It measures the percentage of assets that are being financed by debt.
Total Liabilities / Total Assets
Growth, Sales, and Marketing
- Total revenue
You can get your total revenue number from your income statement. It’s definitely a key number that reveals a lot about volume and sales efforts. This is one of the more fun metrics to track, especially if it’s rising.
Drilling down into your sales details can give you even more information. It might be meaningful to your business to break sales down by location, division, sales representative, product or service line, marketing campaigns, square footage, project, and more. It will depend on your industry as to which breakdown provides the best insights.
- Number of orders
A good point-of-sale system should be able to provide you with number of orders over any period of time. This metric can help you determine trends in sales volume.
- Average order value
The average value of a sales order can tell you how you are doing with upsell efforts. For example, in a restaurant, upsell efforts include suggestions for alcoholic drinks, appetizers, and desserts with a meal.
- Number of qualified leads
Measuring the number of qualified leads can inform the strength of your sales pipeline. This can include counting the number of people in a store, the number of people who called to inquire about your services, or the number of people who landed on a sales web page.
You’ll likely need to set up systems to track this, since this number is outside of your accounting system. Good CRM – customer relationship management – software can help.
- Number of quotes
If your business is service-or project-focused, you might provide quotes or proposals. Tracking the number of quotes provides valuable information about the effectiveness of your sales cycle.
- Number of sales demos conducted
If you conduct demonstrations during your sales process, this measure can be relevant. Think automobile test drives, trade show interactions, and educational webinars for prospects.
- Conversion rates at various parts of the sales funnel
If your sales cycle is long or includes multiple steps, you may wonder which step is most effective and which one needs work. For that, calculating conversion rates can come in handy. Taking some of the metrics above, you can compute multiple conversion percentages:
Number of New Customers / Number of Leads
Number of New Customers / Number of Quotes
Number of New Customers / Number of Sales Demos
Or you can calculate incremental conversion rates. Assume your sales cycle consisted of four steps: leads, initial meeting, proposal, and signed contract. Your measures would be:
Number of Prospects Who Attended an Initial Meeting / Number of Leads
Number of Proposals Sent / Number of Prospects Who Attended an Initial Meeting
Number of New Customers / Number of Proposals Sent
- Cost of customer acquisition
This is an extremely important marketing measure and is easier to calculate than you might think. It measures how much, on average, it costs in marketing and sales costs to sign a new customer.
Total Marketing and Sales Costs / Number of New Customers
This number informs how much you need to spend on marketing if you want to grow your customer base. It’s especially effective if you can break it down by campaign or source of customer, so that you can see what’s working and what isn’t. For example, if you ran a radio ad and a direct mail campaign, you can compare which one was most expensive using this formula.
- Number of touches to conversion
How many times does a prospect need to see your company name, an ad, a blog post, or a web page in order to become a customer? That’s what this metric measures, and it’s a difficult one to actually measure.
- Days to conversion
How long does it take from the time a lead first contacts you before they become a customer? If you have a clearly defined sales cycle, you can measure this.
- Cart abandonment rate
If you use an online shopping cart, this is a classic measure. The formula is:
(Number of people who added items to their cart – Number of completed sales transactions) / Number of people who added items to their cart
- Number of leads per channel
In number 14 above, we mentioned number of qualified leads and this one is a subset of that one. Simply break down the leads that come from each of your marketing efforts to determine leads per channel. Examples of channels include email marketing, networking groups, referrals, Google ads, social media efforts, your website, and others.
- Number of trials opened
Mostly used in software, this measure counts the number of prospects who signed up for a free 15-or 30-day trial of your product.
- Number of trade shows
This simple number is how many trade shows you exhibited at, if this is a marketing channel for you.
- Number of press mentions
If you use public relations activities in your marketing, a relevant measure is how many times you and your company were mentioned in press articles.
- Number of inbound calls
This metric counts how many calls you receive for a particular service, product, or promotion that you’re conducting.
- Number of website visits
Most relevant with online shopping sites, this measure counts the number of visitors to your website or a particular page. You can also find out how many unique visits your website received, which counts when people come back to visit your website again.
There are many other web site measurements available to track, such as Google rankings for web pages; keyword rankings for keyword phrases; bounce rate, which is when a visitor leaves your site from one of your web pages; and many more.
- Number of email subscribers
In email marketing, the size of your list and how it’s growing or shrinking can be a key measure of the effectiveness of this channel.
There are many other email marketing metrics, such as open rate – how many of your subscribers actually open the emails you send, bounce rate – how many bad emails are not delivered, unsubscribe rate – how many people choose to stop subscribing to your list, and complaint rate – how many people mark your email as spam or make a similar comment.
- Number of social media connections, platforms
To measure social media effectiveness, counting your followers is one way to determine your reach or how many people might see your posts. How many platforms you are active on is another metric.
Additional social media metrics include number of posts sent, number of shares (people who shared or retweeted your post), number of comments per post, number of photos posted, number of blog posts or content pieces posted, and others.
- Cost per lead
Cost per lead is a very significant marketing measure. The formula is simple:
Total Marketing and Sales Costs / Number of New Leads
The recordkeeping to track leads is anything but simple. You will need to determine how to count a lead. A lead becomes a lead when a person reaches out to ask about your services. However, you may only want to count leads if they make an appointment with you. The key is to be consistent in your recordkeeping.
- Market share
Market share is an interesting concept that is relevant for large companies. It can also be relevant in small markets where there are a small number of well-defined competitors. The formula is:
Total Company Sales / Total Sales for the Industry
As you can see, the denominator has to be found outside the company’s books. It measures how much of the total market for its services and products the business has. It is also relevant for small businesses when selecting vendors to partner with.
- Brand awareness
Brand awareness measures how many people have heard of you or your company, and there are several measures for it. The most common is number of impressions, and you can measure your online impressions via your website and social media accounts. You can also conduct surveys and campaigns to get your name out. It’s less important in small businesses than it is in large businesses, simply because of the costs involved in measuring this metric.
- Brand perception
Brand perception is how consumers feel about your brand. It is measured through surveys sent to consumers and customers asking them how they feel about your brand as well as your competitors’ brands.
- Online ad metrics
When running online ads, there are several metrics that are important to follow to determine the effectiveness of each ad as well as the overall campaign. A few of the most important ones are click-through rate, conversion rate and return on ad spend. Here are those formulas:
Click-Through Rate = Number of People Who Clicked on Your Ad / Number of Impressions or Page Visits
Click-through rate is important because Google and others use it to measure ad quality, which impacts how high or low your ad appears in search rankings.
Conversion Rate = Number of People who Purchased or Subscribed / Number of People Who Clicked on Your Ad
Return on Ad Spend = Revenue Generated from Your Ad Campaign / Amount Spent on Your Ad Campaign
- Number of customers
While this number is not on any financial statement, it’s an important metric to track. It can help to measure your growth as well as your business’s financial stability. For example, if you only have 4 very large customers and you lose one, you can end up needing to replace a large portion of your revenue.
- Number of new customers
The number of new customers you acquired over a recent time frame can help to measure your growth.
- Net Promoter Score®
Customer satisfaction is important to measure, and the Net Promoter Score is the gold standard. To calculate it, you must send a survey to your existing clients. The survey has one question that requires an answer on a scale of 0 to 10:
How likely is it that you would recommend [brand] to a friend or colleague?
The score is calculated as follows:
Percentage Number of Persons Scoring 9-10 – Percentage Number of Persons Scoring 0-6
- Number of customer support tickets
If you have a customer service department with software that allows customers to submit support tickets, then this measure can be meaningful for you.
- Number of referrals
For service businesses, tracking your referrals is essential. As new clients come in, a great process to put into place is to ask them how they found your business. Once you do that, tracking referrals is easy.
- Customer lifetime value
What is the value of a customer over the many years they purchase from your business? Customer lifetime value measures just that.
The traditional formula is:
Average Revenue per Customer Visit * Number of Average Customer Visits Per Year * Number of Years
A better way of looking at this from a small company standpoint is to run a Sales by Customer report, and include as many years as you have in your accounting or point-of-sale system. Sum the total sales, then divide by the number of rows. It won’t be perfect, but it will save a lot of calculation time.
Comparing this number to cost of customer acquisition (number 18 in our list) can be very insightful.
- Customer retention rate
Do customers keep coming back? This metric is most relevant for retail, services, and restaurants. Measure it by calculating the percentage of customers who remain customers in the following period.
- Customer turnover ratio
Customer turnover ratio is the opposite of customer retention rate. If your retention rate is 85 percent, your turnover rate is 15 percent.
- Number of customer complaints
This measure helps you understand where problems might be lurking in your business.
- Break-even point for number of customers
How many customers do you need to cover your overhead? This metric calculates that number. First, calculate break-even point.
Fixed Costs (or Overhead) / (Sales Price per Unit – Variable Costs per Unit)
As an example, let’s say you sell subscriptions at $50 per month, or $600 per year. Your variable costs are $10 per subscription, or $120 per year. You hire a part-time person to manage it all, so your overhead is about $48,000 per year. The formula is $48,000 / ($600 – $120) = 100. You will need to sell 100 subscriptions, lasting at least a year, before you start to make a profit.
- Returns as a percentage of sales
Merchandise returns are inevitable. If you don’t have any, your prices may be too low. The formula for tracking returns is:
Sales of Merchandise Returned / Total Sales
- Number of full-time equivalents (FTE)
Count how many people you have working full time. Then add part-time employees, using fractions based on the hours they work. If you have two people working 20 hours each, they add up to one FTE.
- Number of total employees
This is simply the total number of people you have on payroll receiving a paycheck.
- Number of contractors
If you hire contractors, this is the number of people you have hired as contractors.
- Revenue per employee
Most relevant for services firms, you can easily calculate this number by taking total sales and dividing by the total number of employees you have working for you.
- Staff retention rate
If employees are leaving your employment frequently, you can track retention rate. Measure it by calculating the percentage of employees who remain employees in the following period.
- Days absent
If you have a lot of employees taking days off over and above your PTO policy, this is a good measure to track. It is likely that your payroll system can track this for you.
- Training days per employee
Very important to disclose in recruiting, this metric allows future employees to assess the amount of training available to them if they decide to join your firm.
- Job satisfaction
How happy are your employees with their jobs? A survey can measure this metric.
- Employee turnover
The employee turnover rate is the opposite of the staff retention rate (number 50 on this list).
- Average employee tenure
How long do employees stay at your company? From your payroll system, you can get each employee’s start date and termination date (if applicable) to calculate length of employment. Then calculate the average by dividing by the number of employees in the formula.
- Number of accidents
Most relevant for construction, manufacturing, and transportation companies, the number of times employees get hurt or are in a vehicle accident is a measure some will want to track.
- Number of employee complaints
This measure should be tracked by human relations, and complaints should be categorized as to whether it’s a problem with the company, a peer, or something else. Discrimination and sexual harassment complaints should be taken very seriously, no matter how small your business is.
- Percentage of staff receiving annual reviews
Do supervisors formally sit down with employees at least once a year to review employee performance and set growth goals for the employee’s career?
- Average raise percentage
How often raises are given and how much can be turned into a metric for human relations tracking.
- Time to hire
How long does it take to hire an employee from the time the first candidate applies to the date of the acceptance letter? Time to fill is another metric that includes the time you decide to add a new employee.
- Cost per hire
How much does it cost to hire a new employee? This can include the costs of ad placement, recruiting, trips to college campuses, job fairs, cost of travel for bringing in out-of-town applicants to be interviewed, and time spent by you and your HR team.
- Number of candidates per open position
How many candidates applied for your job opening?
- Number of employees mentored
If you have a mentoring program, this metric can help you determine the reach of the program.
- Quality of benefits
While this is not a formula, it is important if your company has trouble filling open positions. Many companies increase their benefits when the unemployment rate is low or when there is a shortage of good candidates, so they can attract the best candidates.
- Number of internal promotions
Many employees want to know if there is room for internal growth at your company. Measuring the number of promotions that you have granted to existing employees can track this.
Production / Operations
- Inventory turnover
Inventory turnover measures how many times your items sell over a year. In a way, it’s how fast your products leave the shelves.
Cost of Goods Sold / Average Inventory
To calculate average inventory, take the beginning inventory balance plus the ending inventory balance and divide by two.
You can also calculate inventory turnover in days by dividing 365 / inventory turnover. For example, if inventory turnover is 3, the number of days it takes to sell your inventory is 122.
- On time, full orders percentage or count
If you ship your orders, this is a count or percentage of orders that are fulfilled in full and shipped on time. It can help you see areas for troubleshooting when you run out of stock or why orders ship late.
- Order fulfillment in days
How long does it take for you to fulfill an order from the time a customer places an order to the time they receive the items?
- Days to ship
Once an order is placed, how long does it take your warehouse team to ship it?
- Shipping costs
This item can be found on the income statement. You may also want to compute average shipping costs per order.
- Number of orders requiring rework
A rework order is one where the manufactured item did not meet quality control standards and needs to be fixed or repaired.
- Number of backorders
Back orders occur when a customer orders an item that is found to be out of stock. You might also want to track how long it takes to fill backorders.
- Six Sigma rate
Six Sigma is a set of processes designed to improve manufacturing quality by removing chances for product defects during the manufacturing process. The rate is a measure of defects per one million opportunities.
- Capacity utilization rate
This metric defines how well resources are utilized to create output. In manufacturing, for example, it can be used to measure how much time production lines are up and running.
Actual Output / Potential Output * 100
In a services firm, a version of this metric can measure hours worked by employees compared to total hours available to work.
- Inventory shrinkage
Items for sale can be lost, damaged, miscounted, or stolen. The formula is:
(Recorded Inventory – Physically Counted Inventory) / Physically Counted Inventory * 100
- Downtime costs
Downtime can be defined as time where employees cannot work because computers are not working, machines are broken, inputs have not been received due to supply chain issues, or employees are out sick. These situations cost the company in lost production.
- Accounts payable processing cost
If you process a significant amount of bills, this measure can help you determine efficiency. How much does it cost to process and pay one bill?
- Percentages of department expenses to compare to industry averages
How does your company’s expenses stack up against others in your industry? Typically, there are industry-specific surveys and reports to help you answer these questions. This metric is all about comparing your business’s expenses to competitors to see what’s in and out of line.
While there are certain expenses you want to be below average in, there are others you may want to spend more on. For example, if you want to attract the best employees, spending more on employee benefits might be a good strategy, even though costs are high in that one area.
- Budget variances
Setting a budget for the year can help you stay within guidelines when it comes to spending. Comparing actual expenses to budgeted figures throughout the year allows you to stay on track with your plans and goals, or to be able to adjust quickly when needed.
- Measures for value, vision, purpose statements
Many of the measures we have mentioned in this guide can be mapped to your mission, vision, and values statements. For example, if one of your values is related to employee satisfaction, you can use survey results to evaluate your success.
This mapping is an intentional exercise that you can perform to ensure you are truly carrying out the vision you want for your company.
- Sustainability measures
ESG – Environmental, Social, and Governance – is an entire field where companies are measured on how they impact the environment, where they stand on social issues, and how they govern. Investors and employees are paying more and more attention to a company’s stance on these issues. Currently, standards boards are being developed to create a universal set of standards that companies can follow to develop measures in this area. Sustainability measures relate to the “E” in ESG.
- Number of volunteer hours
Especially important for nonprofits that use volunteers, this is a measure commonly required in grant accountability. Even if your business is not a nonprofit, it’s a measure you can track if you allow employees to take time off to volunteer.
- Amount of charitable donations
Measuring how much your business donates to charity is one metric you can use to determine your community support. Include hours, dollars, and goods.
- Number of outside positions on boards
Do you or your employees serve on boards? This is another measure of community involvement, measuring the “S” in ESG.
- Diversity statistics by gender, race, etc.
Do you track demographics of employees to determine your team’s diversity? This measure can let you know how you track with the general population or your local area.
- Number of women / minorities in executive positions
Women’s and minority initiatives have become important to attract new hires as well as to help current employees thrive.
- Hours of diversity and inclusion training
Does your firm provide diversity and inclusion training? While sexual harassment training is required by law for some corporations, you can go much farther with your diversity curriculum.
- Time to market
Creating new products is key for some businesses, and measuring how long it takes from idea to store shelves is what this metric is about.
- Number of new services/products
How many new services or products does your company provide in a year?
- Number of improvements to current services/products
How many of your current services and products have you enhanced in the past year?
- Amount spent on research/innovations
How much have you spent in dollars and hours on developing new products and services and market research?
Traditional: Financial and Profitability Measures
- Return on equity
Return on equity measures the profitability of a business as it relates to equity. The formula is:
Net Income / Shareholder’s Equity
- Return on assets
Return on assets measures how profitable a company’s assets are. The formula is:
Net Income / Total Assets
- Asset turnover
Asset turnover measures how efficient a company’s assets are. The formula is:
Net Sales / Average Assets
To calculate average assets, add beginning assets to ending assets and divide by two.
- Fixed assets turnover
Fixed assets turnover measures how efficient a company’s fixed assets are. The formula is:
Net Sales / Fixed Assets
Fixed assets include machinery, buildings, computers, vehicles, tools, and furniture. They do not include inventory, receivables, and cash.
- Gross profit margin
Gross profit margin measures profit after direct costs, but before overhead is deducted.
(Revenue – Cost of Goods Sold) / Revenue
It is expressed as a percentage.
- Net profit margin
Net profit margin measures profit as a percentage of net sales. The formula is:
Net Income / Net Sales
This is a good measure to compare with other businesses in your industry.
COGS stands for cost of goods sold. Costs include items purchased for resale, raw materials, labor related to creating the product, parts used in production, and other direct costs of production. You can find it on the income statement.
EBITDA stands for earnings before income taxes, depreciation, and amortization. It’s a more specific measure of profitability that is used by investors.
Your Next Step
It would be overwhelming to try to calculate all of these metrics for one company, especially for a small business. Your next step is to select a small number of metrics that are meaningful to you, that you can record on a periodic basis. Choose the ones that are most relevant to your business. For example, if cash flow is something that needs careful watching, choose a metric that helps you measure cash flow.
The key is: you can’t improve what you don’t measure. If you want your business to improve, you can start measuring the results with a handful of these metrics. If you’d like our help designing the perfect dashboard of metrics for your business, please reach out to us any time.