How can you tell that your business is growing?
Relying on anecdotes or the mere perception of increasing sales is not enough. These may give you a hint that progress is being made, but they could also be deceptive. There’s always a chance that you’re wrong about your business’s position.
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This is why you should have more precise ways to measure growth. Key Performance Indicators (KPIs) calculated based on your financial records can give you quick but accurate insights into your business’s financial health.
Here they are:
Your sales revenue is the total value of the products or services you’ve sold over a given period. It’s calculated with the following formula:
Sales Revenue= Number of Products or Services Sold × Price Per Unit
Note: If some products have been returned or services have been undelivered, make sure to subtract those from the number of units sold before calculating for sales revenue.
When you compare sales revenue from successive periods (weeks, months, quarters, or years), you’ll see how it’s performed, and whether it’s grown, declined, or remained relatively static.
Revenue Growth Rate
Revenue Growth Rate indicates how much your revenue has grown over a particular stretch of time. It is calculated by subtracting the previous period’s revenue from the following period’s revenue and dividing the answer by the previous period’s revenue.
Here’s the formula for it:
Revenue Growth Rate= (Revenue from Following Period – Revenue from Previous Period) ÷ Revenue from Previous Period
The Revenue Growth Rate, when expressed in percentage terms, will reveal how much your revenue has grown over a particular period.
Note: You can express your Revenue Growth Rate in percentage terms by multiplying it by 100. For example, if it’s 0.10, you can multiply it by 100 to get 10%. In that case, your business’s revenues have grown 10% over the period you’re considering.
Your business’s Gross Profit is what’s left after the cost of goods you’ve sold is subtracted from the total revenue you earned from selling them.
The formula for this is:
Gross Profit= Revenue – Cost of Goods Sold
Note: The Cost of Goods sold is the cost incurred in producing them.
Gross Profit gives you an insight into the profitability of your business. If your revenues exceed the cost of goods sold, you’re making a profit. But if the cost of goods sold is greater than your revenues, you’re making a loss.
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Net Profit is what’s left after running expenses, depreciation and amortization, interest, and taxes for the period concerned have been deducted from the Gross Profit. Or it’s what’s remaining after these things, as well as the cost of goods sold, has been deducted from Sales Revenue.
So, the formula for Net Profit is:
Net Profit= Revenue – Cost of Goods Sold – Expenses – Taxes – Depreciation and Amortization – Interest
Your net profit (also called net earnings or bottom line) is what accrues to a business’s owners after all relevant costs have been subtracted from the business’s revenues.
It also indicates if operating expenses are being kept at a minimum (they could eat into revenues if a conscious effort isn’t made to contain them as the company’s sales grow).
Customer Acquisition Cost (CAC)
Customer Acquisition Cost refers to how much it costs to gain a new customer. The cost here relates to the money spent on marketing and sales that converts people in a business’s target market into paying customers.
You can calculate Customer Acquisition Cost with this formula:
Customer Acquisition Cost= Marketing and Sales Expense ÷ Number of Customers Acquired
As a business, your aim will be to keep your Customer Acquisition Costs low. If this cost keeps increasing, it could be a sign that spending on sales and marketing isn’t as efficient as it should be.
Customer Lifetime Value (CLTV)
Your Customer’s Lifetime Value is the total revenue a business can gain from a single customer. It’s a measure of how much a customer is worth to that business.
The easiest way to calculate Customer Lifetime Value is:
Customer Lifetime Value= Average Order Total ×Average Number of Purchases in a Year × Average Retention Time in Years
Note: The Average Order Total is the business’s total revenue in a given period (e.g. a year) divided by the number of orders in that period.
Customer Lifetime Value is often calculated alongside Customer Acquisition Value. Taken together, they could help you determine what customer segments are worth marketing and selling to.
Your goal will be to keep increasing Customer Lifetime Value. You can boost this metric by consistently providing quality content, product, and services to customers.
It’s important to track your business’s growth. The metrics we’ve provided you with here should help you do just that. They will let you see whether the business is going in the direction that you desire, and enable you to take necessary action to sustain its growth.
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