The Top 10 Metrics Every Business Owner Should Know - Part 1

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So you're running a business. How's it going? Well, it looks like things are quite peachy. The question is, how would you know if you're growing your business? And how do you know if you are actually profitable? Well, to know that you have to be tracking the right metrics. So in this two part series, I'm going to take you through the ten business metrics that every business owner should know.

Now, if you've not met me before, my name is Paul. I'm an accountant. I'm a CFO, I'm an entrepreneur, and I've got over 25 years experience helping businesses to grow profitably as well as running three businesses of my own. So I'm not new to this subject and I'm very keen to share some thoughts with you today. Now, before we get into the details, I'd like you to do me a favor and that's click the subscribe button.

I do post new content every week and I would love to be able to share it with you. Okay, so let's get to the matter in hand. What are the metrics you need to be looking at to really monitor and grow your business profitably? Well, let's take a look. 

One source of revenue. Now that might sound obvious, but in my experience, particularly new businesses, they don't necessarily look at this on a monthly basis. And I believe to look at it on at least a monthly basis, if not weekly, and it's something that is the key, it’s money coming in the door, if you think about it. And when I look at revenue, I actually like to look at it in two ways. One is what's known as gross revenue, which is the price that you charge for your products before discounts or anything else.

And then there's the net revenue, the price you end up with in the bank, after you've given all the discounts. And if you've got to pay any sales taxes or anything else that also comes off that. So that's the lower amount. And the reason I like to track that is for discounts. Now, to me a lot of businesses in my experience don't focus on this as heavily as they should.

But the level of discounts that you're giving on your goods or services makes a huge difference to whether you're making money or losing money. And there's not enough focus on it, in my opinion. And that's why it's not to look at revenue at the top line before discounts and then the next amount after discounts. And we can then see how this amount is moving over time. You can even look at this as a percentage, which is really helpful. And then you’ll get a sense of how much money you're giving away in discounts and promotions and whatever else every month. So that's the first metric. 

The second that you're going to look at is gross profit. Now, some of you probably heard of this, maybe many have heard of this. Let me talk you through what this is. This is the profit you're making by looking at the net revenue - the net amount you receive in terms of cash from the sales less all the costs directly related to making that sale. Sometimes those costs are called direct costs, some call them variable costs. But  the point is you only incur those costs when you make a sale. And if you make no sales, those costs are zero. 

Well, how are we going to calculate this? So let's say in this example, our net sales were $10, right? So what are we're going to take off in terms of our variable costs? Say, we're selling widgets. So the widget costs me $4 to buy in. Okay, then maybe I've got shipping costs because I'm shipping things out to customers and that might cost me another $2. I might also have transaction fees. That's quite likely if you're taking credit card payments or anything else like that. In this example you're left with your gross profit of $3 per item. And again, you want to be tracking both the gross profit per unit as an amount and also as a percentage, which is also very helpful and see how that percentage is moving, month by month.

And of course, the idea is to try and make the profit as big as possible, which means making these costs as low as possible and the revenues as big as possible, which does then play into discounts. Now, I know what you're thinking. Why am I spending 4 minutes and 43 seconds looking at that?

Well, this is where it starts to get interesting. And we come on to metric three, and that is to start looking at things on a unit by unit basis, just like we've done here. Imagine if you're looking at your accounts for your business and it might say last month your revenue was $20,000 and your gross profit was $4,000.

Well, that's interesting to a certain extent. And you can see how that's going up or down as months go on. But you can't use that information to do very much about it. You think, okay, it is what it is, so it's fine. But if you start looking at the number of units of whatever it is you're selling, and by the way, all of these metrics apply equally to service businesses as well as selling physical products, you start to find out some very interesting things.

So if you take your revenue and your gross profit and divide by the number of units you're selling in a month, you start to see how things look on a unit by unit basis, just as we've done here. So it could be that when you start doing that, you see that you're getting $100 in gross sales. Your net revenue might be $80.

But for that same measure, perhaps you're thinking “I'm giving $20 away in discounts for every single product I'm selling. Wow, that's high!” or “actually, that's probably okay”. It's so interesting when you start looking at costs per item, for example shipping of $2 per item, does that sound right? Or does it sound like a lot, depending on where your average customer lives?Can I get that any cheaper? This is when you can start to really interrogate the numbers and make sense of them. 

This is particularly powerful if you're not particularly numerate, because, getting things turned into amounts per unit, are much, much easier to understand. In this example here, I'm making $3 for every unit that I'm selling.

That makes perfect sense. You can get your head around that. I'm getting $10 in sales, but I'm only getting $3 in profit. And you think, how can I make that profit more? And this is really, really powerful. It really will unlock the numbers, particularly, as I say, if you're not particularly into numbers or financially minded.

And in my experience, not many businesses do this. But the extra insight you get by doing that is really powerful. In fact, I almost made this my killer metric. We had a very spirited discussion in the office about which of these metrics we would put in. I've gone with something else, but it's still a really, really key metric.

Okay, so those are the first three. Number four is we need to be tracking our fixed costs. Fixed costs have a couple of different names. You might also know them as operating costs. You might also know them as overheads. Now, as the name implies, what these costs are, if you think of all the costs for your business, you've got the variable costs we've just talked about, the ones that fluctuate depending on how many things we are selling.

Then you've got your fixed costs, which are costs which largely stay the same on a month by month basis. Or perhaps better put, you will incur those costs regardless of whether you sell zero items or a million items, they don't change. They're things such as premises rental, utility bills, fixed retainers, or wages that you pay out.

Over time, of course you can scale these up or down, but largely you incur the same kind of costs every month. And they are independent to a large extent of what you're selling. And the reason that I put this on here is that this is something I want you to track on a monthly basis to see how it's fluctuating, because what I find is working with many businesses, people are all about focusing on the variable costs, such as how much is my postage, how can I buy this unit for slightly less money, which is all great. But these fixed costs have a habit of creeping up over time. In most businesses, particularly when you start making money and making profit, you start thinking, “I've got more cash so I’ll buy everybody new laptops” Or you might start to travel more. Or move to a flashy office, all of these things.

And I'm not saying don't do those things, but what I am saying is you should be tracking how these fixed costs are moving in line with your sales. And if you think about this as a proportion of your revenue, over time, those should go down. And it's really important to have a laser focus on these, in detail. 

So those are my first four, which brings me on to today's killer metric. And when I first came across this one, which was quite a few years ago, now I can tell you, just like the revenue and profit per unit, it really opened my eyes - that is the break even quantity.

Now I know what you're thinking, what the blazes does that mean?  Well, let me tell you.  Break even is the point when we go from making losses to making profits. So the break even quantity is really saying is how many things do we need to sell every month to cover all my fixed costs? That's the minimum you need to sell in any given month. So know that you can pay all of your bills. So it's really, really important, particularly if you're not profit making yet, which many new businesses aren't, as it takes a while to get there. It isn't it. And this really focuses the mind on what you need to sell, plus it’s a really simple equation.

You take your fixed costs, which you've just worked out above and you're going to divide that by your gross profit per unit, which we looked at in point three above. So you've already got the numbers you need.

So let's put some color into this. Let’s say every month my fixed costs are $10,000. Okay? That's why I need to spend to keep the lights on. And let's say my gross profit is $10 per item. So if I divide the 10,000 by the $10, that basically means I need to sell 1000 units every single month just to cover my fixed costs. If I'm not selling that, I'm absolutely going to be losing money. And you can also share this number with other people. Maybe you have got a sales team of people helping you. So that's a really good number for them to focus on. And you can say that's per month, but you can break it down by week. So that's 250 units per week or that's probably about, I don't know, about 35- 40 units a day. 

When you start thinking about it in those terms, this is where the numbers can really help you grow your business profitably. And that's why that's my kind of metric. I use this all the time and whether you are big business or a small business, it's always helpful to keep a very good eye on this because if you think about what else can affect this, if we look at what's in the equation, if I get my fixed costs down, I'll need to sell less. Or if I get my profit per unit up, I'll also need to sell less. So that's for this. So there's more at stake with this formula than just selling more stuff; you can be a bit smarter in terms of how you do it, because there's several things affecting your profitability.

And so yeah, I'm going to stop there. That's metric five out of ten. I hope you found those helpful. If you're not not comfortable with numbers and calculating these metrics, do get yourself a good accountant or someone who can help you pull those numbers together.

It's quite straightforward once you get your head around it. And to make things even easier, what I've done is I've taken these points and I've condensed them into a free fact sheet, which you can download below, which you can take away, think about, and apply them to your own business. 

And if you do that, I'm also going to send you another free factsheet, which is my guide to turbocharging your cash flow in ten easy steps. These are steps that I've learned over 25 years working with a range of clients, and they really do work, so it's well worth downloading and having a look at that.

 And if you haven't done it yet, as I say, do subscribe to my channel because I'd love to be able to chat to you again. But thanks so much for your time and I will see you in the next video.