Last Updated May 22, 2024
How to measure success in business is perhaps the biggest question on the minds of small business owners. Regardless of industry, finding what qualifies as true “success” can be a challenge.
Understanding which business performance metrics indicate that your company is in good shape will help you take steps that will keep your business in the black for years to come.
Track These 12 Essential Business Metrics to Measure Business Success
Assessing business performance starts by understanding some key metrics for business performance. The following are some of the most important metrics you should pay attention to when evaluating your business activities.
Cash Flow
Cash flow measures the movement of cash in and out of your business. It is one of the most essential business metrics to track because it provides a quick look at whether you’re earning more than you’re spending. A positive cash flow generally means you’ll have enough money to pay ongoing expenses, as well as invest more into the business to fuel further growth.
Because of this, taking steps to improve cash flow should always be top of mind.
Net Working Capital
Net working capital is another measurement of financial health that tells you how much money you have to manage your business’s short-term expenses. Net working capital measures your current short-term assets (like cash, inventory, and cash equivalents) minus your current liabilities (such as payroll taxes and accounts payable).
Good working capital management ensures your business has enough liquidity to manage its financial operations. Net working capital can also help you understand how well your business could deal with market disruptions or other challenges.
Net Income
Net income is one of the most important financial metrics—even more important than revenue. Net income is calculated by subtracting your operating expenses from your total revenue. Positive net income means you can cover your expenses without taking on debt or seeking out other forms of funding assistance.
Net Profit Margin
Net profit margin works similarly to net income but instead focuses on the percentage of your total revenue that remains as a profit after you pay other business expenses. It is calculated by dividing your net income by your total revenue. A high net profit margin indicates a healthy business with sustainable spending.
Monthly and Annual Revenue
Monthly and annual revenue measures how much total money your business earns in a month or a year. Obviously, these are numbers that you want to see continually going up! Your revenue should increase your expenses to ensure good financial health for your business.
Return on Investment (ROI)
Return on investment is an important way to measure whether a business investment has performed as desired. It is typically measured as a percentage and calculated by taking the current value of the investment and subtracting its cost, then dividing that total by the cost of the investment. ROI is frequently used to measure the effectiveness of marketing campaigns to determine if they contributed to business growth.
Return on Assets (ROA)
Return on assets measures a company’s profitability in relation to its total assets (including borrowed capital). It is measured by dividing net income by total assets. A high ROA indicates that a company is using its assets in a more efficient manner and can help you understand the earnings generated by your assets.
Return on Equity Ratio (ROE)
Return on equity ratio can also help gauge your profit levels based on your net income and shareholder equity. Net income is divided by shareholder equity to help you understand whether your business investments are generating a profit. A high ROE ratio means your company received more income per shareholder investment.
Accounts Receivable Turnover Ratio
The accounts receivable turnover ratio is a measurement of your ability to efficiently collect outstanding receivables during a specific timeframe. This helps you see how many days it usually takes for your business to collect credit payments. This can help you better manage cash flow and determine if you need to adjust your payment terms to obtain faster payments.
Marketing and Sales Metrics: Leads, Conversion Rate, Bounce Rate
Understanding whether marketing and sales efforts have the desired impact is key to maintaining steady growth. Leads indicate the number of potential sales that were qualified by a sales or marketing initiative. The conversion rate indicates how many of these leads became paying customers—so obviously, you want a high conversion rate.
Finally, the bounce rate is an important online metric because it indicates how many visitors “bounced” or quickly left your website after visiting. A high bounce rate could indicate you need to improve your website or adjust your marketing messaging to better match what leads are looking for.
Customer Success Metrics: Retention Rate, Churn Rate, Lifetime Value
After someone has become a paying customer, there are several metrics that can help you analyze business performance. Your retention rate is the percentage of customers who will continue paying for your products or services over a set period. Churn rate, on the other hand, is the rate of customers who stop doing business with you during that same time. You want to increase your retention while lowering churn.
It’s also worth paying attention to the lifetime value of each customer. Customers who are “retained” and keep buying from you ultimately have a higher lifetime value because of their repeat purchases. They also drive higher value because you don’t have to keep marketing to them to get them to make purchases.
Employee Metrics: Employee Satisfaction and Employee Turnover
Your employees make or break your business. Satisfied employees are more productive, deliver better customer service, and can contribute to innovation and growth. You should continually take steps to improve employee satisfaction.
Measuring employee turnover can also help you understand if you need to make changes to your company culture. High turnover could indicate issues with pay, work environment, or other factors that cause you to miss out on top talent.
Learn the Three Major Financial Statements and Compare Them With Previous Cycles
When trying to determine how to measure a company’s financial performance, understanding the three major financial statements is crucial. With these financial statements, your goal isn’t to compare yourself to other companies. Instead, you use these statements to compare your own current and past performance to identify growth opportunities or areas that need to be improved.
Balance Sheet
A business balance sheet displays the business’s total assets and liabilities, as well as the owner equity. Assets include current assets like cash and accounts receivable, as well as fixed assets like property and equipment. Both current and long-term liabilities are included, while owner equity covers areas like retained earnings, common stock, and additional paid-in capital. Balance sheets are usually generated quarterly.
For a balance sheet, assets should equal the liabilities plus owner’s equity.
Cash Flow Statement
A cash flow statement shows how much cash you have on hand, while also detailing all incoming and outgoing money. Cash flow statements are generated monthly, quarterly, and yearly to reveal liquidity and show changes in assets and liabilities in comparison to prior periods. Regularly reviewing cash flow statements helps you predict future cash flow based on current and past performance, and identify when you enter into a period of negative cash flow.
Profit and Loss Statement
A profit and loss statement shows how much money your business has made and lost during a set period. It is broken down into revenue and expenses. These statements are often itemized to give you a clear understanding of how you are earning and spending money.
Reading and analyzing a profit and loss statement helps you calculate your business’s net income, assess whether your business has been able to save and invest over a specific period, and identify trends in revenues and expenses. Comparing to past periods helps you see if revenue and expenses are increasing or decreasing so you can adjust operations accordingly.
Other Tips for Measuring Business Performance
The above financial reports aren’t your only options for how to measure company success. The following tips can also help you measure business performance and find ways to improve.
Create a Business Plan Focused on Goal-Setting
Every business plan should have goals that the company can work toward. These goals are often called key performance indicators (KPIs), and they should include long-term performance measures (big picture goals) and short-term performance measures that help track your progress toward those big picture goals.
Business goals should be specific, quantifiable, realistic, and timeline-driven. When your business plan implements these types of KPIs, it gives you a clear direction to work toward and makes it easier to determine which areas should be measured.
Determine Performance Criteria for Your Product
How do you determine performance criteria for your product? Start by determining which KPIs indicate success for the product, such as sales numbers, customer satisfaction rate, profitability, overall market share, or retention and churn. Customer acquisition cost and lifetime value or average revenue per user can also help you determine the profitability of a product.
By using these KPIs to measure the results for a specific product, you can determine whether it is performing according to your expectations and goals.
Calculate Changes in Working Capital
You should track changes in working capital so you always have a clear picture of your liquidity and overall business health. Areas like accounts receivable and accounts payable, inventory management, loans, and business purchases can all have a direct impact on your working capital. Tracking these changes will help you identify ways to increase net working capital through improved invoicing processes and other methods.
Use Surveys to Get Feedback From Employees and Customers
Quite often, knowing how to improve business performance depends on your employees and customers. Soliciting customer and employee feedback through focus groups, emails, social media, and online reviews can help you identify what your business is doing well and where it needs to improve. These activities don’t always reflect directly on the bottom line, but they will lead to better results thanks to improved satisfaction and retention.
Set Key Performance Indicators (KPIs)
Strong business performance analysis relies on good KPIs. Set business performance KPIs that are most relevant to your business goals and activities. While there are many business performance measures you could focus on, make sure that you prioritize the KPIs that have the greatest impact on your growth and bottom line. Don’t get distracted by KPIs that might be important in another industry but aren’t as applicable to your own performance goals.
Create Your Own Case Study
Some businesses use case studies to evaluate and learn from past performance. For example, a case study could look at how a particular marketing initiative impacted your sales growth, or how a change in manufacturing processes improved product quality. A deep dive into these and other areas can help you understand the principles behind business successes (and failures) so you can create more wins in the future.
In Summary: How to Measure Success in Business
Any financial metric in isolation won’t paint an entire picture of your business’s performance. Measuring true overall performance requires a holistic approach. Calculating several financial metrics, looking back on all your previous business goals, and identifying KPIs before analyzing all of these will help you gauge whether your business is headed in a positive or negative direction.
Ultimately, there’s a slim chance you’ll reach every single business goal and trend positive in each financial metric. You should strive for perfection, yet understand that even the most successful companies aren’t perfect. What’s most important is that you remain consistent with analyzing your company’s performance over each period so you can adjust operations accordingly depending on your findings, thus bettering your business.
Business Performance Measurement FAQs
What are the best ways to measure business success?
Knowing how to measure the financial success of a business using cash flow statements and profit and loss statements will give you a clear understanding of your current financial picture. These documents give you a better understanding of your revenue and expenses, and whether they are increasing or decreasing over time.
How can I improve my company’s financial performance?
Understanding how to improve a company’s financial performance starts by gaining a clear picture of your current financial situation and setting a budget. Measuring cash flow, net income, and other small business performance metrics will help you identify areas for improvement.
Reducing business expenses and adjusting payment terms for timely accounts receivable collection are common best practices. Other common tactics to improve financial performance include selling business assets, increasing prices, offering markdowns to move excess stock, and taking steps to consolidate debt.
A strong business plan with clear goals and guidelines for financial activities will help you keep your financial performance on track.
What are some of the most important KPIs for the average business?
Measuring business performance with the right KPIs will help you focus on the right activities and achieve sustainable growth. Focusing on KPIs such as profit margin, cash flow, net working capital, customer lifetime value, conversion rate, and retention rate will help you stay financially healthy while growing your customer base.
How can I get feedback from customers?
Figuring out how to get feedback from customers will help you identify ways to improve your products and services so you can enjoy better conversion, retention, and lifetime value. Some of the best ways to get customer feedback include surveys, emails, interviews and focus groups, social media posts and polls, and online reviews. Proactively reach out for feedback to get the insights you need.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
