7 Financial Metrics You Need To Know (And How To Improve Them)
Ever heard the term “you can’t manage what you can’t measure?”. It’s very true and when it comes to business, you need to know your numbers. The exact metrics you keep track of will depend on the type of business, but we’ve listed the top 7 most important ones so you can make smarter decisions. Let’s go!
1. Revenue
This one is obvious and important! This is all the money you make from your goods or services before subtracting any expenses. Also if you haven’t already set this up in your accounting program, split up the revenue by product or service. E.g if you’re a gym owner rather than putting all sales into one, separate:
Revenue from regular memberships.
Revenue from class memberships.
Revenue from the supplement store.
Revenue from other activities.
This will allow you to see which products or services are bringing in the most revenue. The next step is to find out which ones are more profitable.
2. Profit
This is much money you keep after you’ve delivered the product or service and paid all expenses. If your business is making a profit it means you are earning more than you are spending — which is obviously what you want! It’s worth mentioning there are different types of profit.
Gross Profit
Total revenue minus the cost of delivering your product or service. E.g if you sell a piece of equipment for $1000 and it cost $400 to buy the equipment and $100 in packaging, you’d have a gross profit of $500.
Or if you’re a marketing agency and you charge $5000 for a website and pay $3000 to a team of contractors, your gross profit would be $2000 (40% margin).
Operating Profit
Your gross profit minus any other expenses (like marketing, software, admin, rent etc). It varies by industry by 15% operating profit margin is usually considered healthy.
Net Profit
What’s left after you’ve subtracted operating expenses and income taxes. This is also known as your ‘bottom line’ and it’s what you keep in your pocket. 20% is considered high, 10% is average, 5% is low.
3. Customer Lifetime Value (LTV)
The total value of a customer, including all future purchases. E.g if you’re a gym and you charge a $50 sign up fee and then $50/month. If your average customer stays with you for 2 years then your LTV would be ($50 + ($50 x 24) = $1270. Some may stay longer and some may stay less, but try to find your average.
If you have any other upsells or cross-sells (like a supplement store or personal training sessions) you would factor that in as well. It doesn’t have to be 100% accurate, just enough to give you a pretty good idea of what a customer is worth.
This also helps you plan out your projected revenue. E.g if you are running a lead generation campaign and you convert 5 customers, you can estimate you will have $6,350 in future revenue (5 customers x $1270 LTV)
4. Customer Acquisition Cost
This is how much it costs to acquire a new customer (in marketing, sales, time etc). To figure this out you simply divide how much you spent vs how many customers you generated. E.g you spent $1000 in marketing and had 10 customers sign up, that’s $100 per customer.
Obviously, the lower the better, but that doesn’t mean the goal is not to spend as little as possible. It’s all about understanding your business and how much you can afford to pay to acquire a customer whilst being profitable.
For example, is $50 per customer or $500 per customer better? Well, it depends on the business! If it costs $50 to acquire a customer but you only make $70 revenue, that’s not great. If a customer costs $500 but you make $3000, that’s very good!
5. Average Order Value (AOV)
This is how much a customer typically spends with you each purchase. Let’s say you’re an eCommerce store and you sell lots of products with verifying price points. On average, a customer might buy $80 worth of products.
Obviously, each customer is different — some will buy more (e.g $200) and some will spend less (e.g $30) but the goal is to find the average. This helps you forecast revenue, profits and marketing costs.
An easy way of calculating this is simply looking at your revenue for a certain period (e.g 30 days) and dividing it by the number of orders. E.g you made $7,200 in revenue and had 57 customers, the AOV is $126.
Once you know this, you can come up with ways to increase AOV such as offering upsells at check-out, creating bundles, offering free shipping if they buy a minimum (e.g $150) etc.
Note — this is different to customer lifetime value (LTV). LTV is factoring in all future purchases, whereas AOV is only measuring on a single transaction basis.
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6. Monthly Recurring Revenue (MRR)
This is how much money comes from repeat purchases or subscriptions (vs one-off payments). This is very common for gyms, agency owners, subscription products and software companies — but it can be applied to any business.
Creating a business around recurring revenue is a great business model. It gives you more predictability, financial security, diversified income and means you can spend more time keeping customers happy instead of constantly having to acquire new ones.
If you’re more in the one-off transaction model (e.g a cafe) you can still come up with ways to install MRR with things like loyalty programs, a subscription to coffee beans etc. If you’re a personal trainer with clients who come and go you could offer monthly resources, recipes, tips and other handy info.
You might also be a combination of both, e.g a marketing agency that has social media retainers, but also offers one-off services like websites or branding. If you can combine the two by getting a one-off client to sign up to a monthly service, that’s even better!
7. Customer Churn Rate
If you have recurring revenue, this is the percentage of customers who drop off each month. This is an incredibly important metric for businesses that depend on MRR (examples above). It’s normal to have 5% - 10% churn or so (depending on your industry) but anything higher than that needs some attention.
The best way to reduce churn is to do the obvious — provide amazing service! However, another great way to reduce churn (or at least find out why people are leaving) is a quick and easy cancellation survey. 📝
When a customer goes to cancel, use it as a learning opportunity. Find out why they want to leave, and if you can, offer them something relevant to stay. E.g if they’re not using your product, you could offer a free demo or pause the account instead of cancelling it. If it’s too expensive, you can offer a reduced rate for 3 months.
Even if they do leave and there’s nothing you can do, it will be useful information to reduce churn for future customers. Just a tip — make it as easy as possible to get feedback with multiple-choice options (e.g price, bugs, missing features etc) rather than open-ended questions.
If you don’t have a customer retention strategy in place, it’s time to make one!
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