In this article, FELIX OLOYEDE outlines five metrics to help you gauge your business’s performance
Many businesses fail because their proprietors do not usually assess their performances periodically. As humans, we are advised to visit the hospital for periodic medical checkups to know the state of our health. Likewise, businesses need periodic assessments to ascertain their health and how well they are doing.
Though many key performance indicators determine the health of a business, these five metrics will help you know the true state of your business:
Operating costs
Monitoring your running expenses is essential. According to Investopedia, operating costs are the expenses associated with the maintenance and administration of a business on a day-to-day basis. “Operating costs include direct costs of goods sold and other operating expenses—often called selling, general, and administrative —which include rent, payroll, and other overhead costs, as well as raw materials and maintenance expenses,” the financial education platform explained.
When calculating your operating expenses, you need to exclude non-operating expenses related to financings, such as interest, investments, or foreign currency translation.
To get your operating costs, you have to add costs of goods sold and operating expenses.
The cost of goods sold is one of the most important components of operating costs. You need to closely monitor it. It helps you to know the amount you are spending on raw materials, labour, energy, etc.
Knowing your COGS will help you know when to reevaluate your supply chain, adjust your pricing, or expand your workforce. And it has a direct impact on your taxes.
So, you must check your operating costs from time to time.
A business financial coach, Mrs Fayo Williams, told The PUNCH that startups must always be mindful of their costs. “Every business that operates with a low-cost structure is likely to do better than the one that has a high-cost structure,” she pointed out.
The Principal Partner, Adeboye Kayode D & Co, Oluwakayode Adeboye, said small businesses must keep a tab on their account records. “If you can monitor your revenue and expenses daily, you will know the health of the business.” He added that matching revenue and expenses will enable the business owner to know if he or he is making a profit.
Gross profit margin
The essence of every business is to declare profit at the end of the day. Any business that fails to be profitable will die in no time.
Gross profit margin is the profit left over after deducting the cost of goods sold, according to Investopedia. It explained that it is the money a firm makes after accounting for the cost of doing business. So, gross profit margin is your company’s total revenue minus total costs, divided by total revenue. To turn it into a percentage, multiply by 100.
For your business to survive, your gross profit margin must be stable, meaning that your revenue must be higher than your expenses. Having a negative or declining gross profit margin is an indication that you must find a way to trim your costs.
So, you must analyse your gross profit margin annually. Some experts believe that tracking it weekly or monthly could be misleading, especially if you have made a big investment in new equipment.
“If your gross profit margin continues to climb over time, it is a good indication that your business’s financial health is in good shape,” wrote HubSpot.
Williams noted that small businesses must measure their net profit margin. She noted that they need to do this by preparing an income statement, preferably monthly.
Staff attrition rate
Another important metric that startups must monitor is their staff attrition rate. Personio, a human resources consulting firm, defines the attrition rate as a metric that quantifies the rate at which employees depart an organisation, whether voluntarily or involuntarily. “It represents the pace of employee turnover, expressed as a percentage and serves as a key indicator for HR teams to evaluate retention efforts and understand organisational dynamics,” it stated.
Williams explained that if small businesses have a high attribution rate, which indicates that they often lose staff members, then they have to train and retrain, which is costly.
Personio expounded that to calculate staff attrition, a firm needs to take the number of people who have left the company and divide that by the average number of employees over some time. It is often expressed as a percentage.
Customer acquisition
Customer, they say, is king. To remain in business, a startup must always strive to retain its customers and acquire new ones.
Williams advised that small businesses must monitor their customers to know if they are going elsewhere or they are retaining them. “There is a lot of competition out there. If you are not doing everything within your power to retain your customers, then there will be a loss of income,” the business financial coach noted.
The ability to retain customers is crucial to the success of any business. Some business experts stated that increasing customer retention rates by 5 per cent could ramp up profits by 25 per cent to 95 per cent.
Sustainability
Willaims also noted that startups make their businesses sustainable. She urged them to ensure that their business operations do not hurt the environment. “They have to have a policy of recycling and being a solution and not being part of the problem, the business coach mentioned.
Adeboye added that it is equally important for small business owners to know their assets—current and noncurrent assets. He explained that current assets are cash, stocks and other things that a business needs for its daily operations. On the other hand, noncurrent assets are fixed assets, such as machinery, buildings, etc.
He advised that businesses should have more credits than debtors because it will allow them to use other people’s money to finance their businesses.
According to an energy expert, Dr Patrick Agese, energy conservation is the only way to cut costs.
Agese, who is the Chief Executive Officer of Pam Africa, a renewable energy firm, advised that household members should be taught how to adopt energy-saving habits, such as turning off lights and appliances when not needed.
He suggested the use of cold water for laundry while avoiding excessive heating or cooling.
“Ensure that your appliances and air conditioning systems receive regular maintenance. Clean air filters, coils, and vents to improve efficiency and reduce energy consumption,” Agese stated.
He added that people should consider installing solar panels to generate electricity, stating, “While the initial investment may be high, solar power can significantly reduce long-term energy costs, especially in areas with ample sunlight.”
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