7 Key Financial Performance Metrics for Evaluating Business Performance
There are few functions in your business as important as finance. It’s the heart of your business; every aspect of your company, from income to payroll to taxes, is connected to financial processes.
It’s the perfect place to examine when you need to get serious about improving business performance.
7 Important Financial Performance Metrics
Seven of the most important financial performance measures small businesses need to track are:
1. Gross Profit Margin
Gross profit margin helps you understand whether you’re charging enough for your services. It’s a simple equation; take your net sales revenue and subtract the cost of goods sold. You’ll see what kind of returns to expect from your current pricing model.
2. Net Profit Margin
The counterpart to gross profit margin is the net profit margin financial performance metric. Take your gross profit metric and subtract operating expenses, taxes, and any other outlays. Net profit margin describes how much of your company’s revenue becomes profit.
3. Current Ratio
Current ratio details a company’s liquidity and its ability to pay short-term debts. Divide current assets by current liabilities and compare the total to industry averages to see how much flexibility your business has.
4. Contribution Margin
Contribution margin is another way to assess the profitability of particular services on a granular level. There are many different ways to apply contribution margins in small business bookkeeping and accounting, so make sure you’re handling these calculations with care.
5. Customer Acquisition Cost
Do you know how much it costs to gain a new customer? Customer acquisition cost is crucial for understanding how much it costs to acquire new business. It measures the effectiveness of marketing. HubSpot offers some good tips on how businesses can calculate customer acquisition costs for companies just starting out.
6. Customer Lifetime Value
Acquisition is one thing, but how much value are your customers providing over the course of time? This is your customer lifetime value metric. It’s a crucial component for any financial performance report.
This complex metric takes into account customer revenue measured against projected lifespan with the company. With this, you can get an idea of how much revenue to expect from different customer segments and which markets may be more profitable than others.
7. Labor Value Multiple
Labor value multiple compares how much revenue your teams gain vs. the cost of employing those teams. For service businesses, this is a big metric. Make sure you understand how to calculate your labor value multiple and what it means for your hiring/pricing decisions.
Financial Performance Reports for Small Business Accounting
Your finance department is tied to every other business operation. Everything you need to know about income, expenditures, and customer behaviors can be found in your financials. With minor planning, you should have no trouble evaluating these major performance measures.
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