Business MetricsMetrics

Measuring Business Performance Is Key to Achieving Success

To measure business performance, gather eye-opening KPIs and metrics. Relying on one metric or gut feelings cannot take you far. In this article at HubSpot, Clifford Chi discusses 7 metrics that you can use to measure business performance.

Optimizing Business Performance

There are several parameters available, so understand which metrics are relevant to optimize your business performance. Following are the 7 metrics to figure out your business performance:

Revenue Curve: Subtract the profits earned from sold products from the loss incurred due to damaged or returned products to get revenue. Do this for every year and compare the previous year results with the current. Since every business is unique, compare internally for this metric to avoid unwanted stress.

Fixed Costs: It measures expenses that will happen irrespective of how your business performance is. Office rent, website, utility cost, property tax, loans, equipment maintenance, health insurance, etc. are some of them. Use the following formulae:

Total Fixed Cost = Office space + Website + Equipment etc.

Average Fixed Cost = Total Fixed Cost / Total No. of Units Made

Variable Cost: This calculates the amount you invested in labor and raw materials to create a product unit. The more units you sell, the higher the variable cost go. Include raw materials, equipment, sales compensations, salaries, credit card payments, online payment partnership, and packaging and shipping expenses. Use the following formulae:

Total Variable Cost (TVC) = Cost to Make Product x No. of Units Made

Average Variable Cost = (TVC of Product A + TVC of Product B, etc.) / Total No. of Units Made

Contribution Margin: Subtract the revenue a product unit generates from the variable expenses to get results. While variable expenses depend on product production, fixed expenses are based on business operations. Use the below formula:

Contribution Margin = (Total Sales Revenue – Cost to Make Product) / Total Sales Revenue

Break-Even Point (BEP): When business revenue matches total costs, you reach the break-even point. Reaching the break-even point faster leads to better business performance and profits. Use the following formula:

Break-Even Point = Fixed Costs / (Total Sales Revenue – Product Costs)

Costs of Goods Sold (COGS): It measures the cost of procuring or manufacturing goods you have sold during a timeframe. Include the costs of procuring raw material, manufacturing, and labor, etc. When COGS increase, your business performance decreases. Calculate COGS in three ways—First In, First Out (FIFO), Last In, First Out (LIFO), and average cost method. With FIFO, identify the oldest inventory item and sell it first. With LIFO, sell the newest items first. With the average cost method, calculate the mean cost of inventory to avoid high inflation period.

Gross Profit Margin: Subtract COGS from total revenue to find out gross profit margin. Use the following formula:

Gross Margin = (Revenue – Cost of Goods Sold) / Revenue

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