7 Key Metrics Every Business Should Follow

7 Key Metrics Every Business Should Follow
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7 Key Metrics Every Business Should Follow

If you follow professional sports, it is obvious that you can’t just determine a player’s value or ability to perform based on a single statistic. It is not possible for one metric to reveal that much insight — analytics is more complicated than that. Getting a full picture of a player’s ability to perform and gauging their true value, requires a thorough examination of numerous statistics or metrics together.

7 Key Metrics Every Business Should Track
  1. Revenue Growth

Revenue is the number of sales you generate by selling your product minus the cost of returned or undeliverable items. Every functional business uses revenue growth as a key metric to measure their financial performance. Apparently, to earn the highest amount of revenue possible is really good, but the metric that truly reveals your business’ financial performance is year-over-year revenue growth.

  1. Average Fixed Cost

Fixed costs are your business’ costs that remain constant irrespective of how much or how less of its product your business is selling. For instance, your rent on office space, website hosting costs, utility bills, manufacturing equipment, small business loans, property tax, and health insurance are all fixed costs because irrespective of how much product you develop, ship out, and sell, these costs remain the same each month.

In order to find out how much your business will have to pay for each unit of your product before you account for the variable costs needed to actually produce them, you need to calculate your average fixed cost, which is your total fixed cost divided by your total number of units produced.

  1. Average Variable Costs

Variable costs are the cost of all the labor and materials used to produce one unit of your product. Your variable costs are directly dependent on the amount of product you sell. Therefore, the more units you sell, the higher your variable costs, and the fewer units you sell, the lesser your variable costs.

A few examples of variable costs are physical materials, production equipment, sales commissions, staff wages, credit card fees, online payment partners, and packaging.

  1. Contribution Margin Ratio

Contribution margin can be calculated by subtracting the variable costs needed to produce a unit of product from the revenue it generated. Since your variable costs are directly linked to producing your product and fixed costs are directly linked to keeping your business in operation and not producing your product, contribution margin assists you in understanding how profitable each of your products is.

  1. Break Even Point

The breakeven point of your business is the amount of product you must sell in order to ensure that your total revenue equals your total costs. It is important to know your break-even point because it serves as the smallest goal your business should try to achieve so as not to lose money during a specific time period. Even better, if you go beyond your break-even point, your business will turn a profit within that period of time.

  1. Cost of Goods Sold

Your business’ cost of goods sold is the cost of making the products you sold during a certain time period, like material, manufacturing, and labor costs. Put differently, they’re your cost of sales or cost of doing business.

It is important to track the cost of goods sold, or COGS because they directly have an effect on your business’ bottom line. For example, when your COGS increase, your profit will decrease, and when your COGS decrease, your profit will definitely increase.

  1. Gross Profit Margin

Your gross profit is calculated by subtracting your COGS from your total revenue. Gross profit margin shows your business’ production efficiency or ability to improve your material, manufacturing, and labor costs. Nonetheless, since gross profit is a pure dollar amount and not a percentage of your revenue, it can go up even when your financial performance declines.

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