6 Essential Business Metrics Every Entrepreneur Should Know

Though businesses often begin with an idea, it takes more than passion to turn it into a profitable business. For creators, your focus might centre on the creative side of a business or you are unsure of what to measure. Building a successful business requires you to wear your creator and entrepreneur hat which involves knowing the business metrics to track that tell you how your business is doing and where you need to improve.

“Skill is a prerequisite for creative success, but talent is only part of the equation,” says Jeff Goin, best selling author of Real Artists Don’t Starve. Your commitment to track and analyse the metrics shared in this article increases your chances of growing your business and earning from your skills and services.

6 key metrics to track in your business

If you are a new business owner, you might be unsure of what exactly you need to focus on to measure the performance of your business. Here are 6 key metrics every entrepreneur should keep an eye on:

• Sales Revenue
• Monthly profit and loss
• Cost of acquisition
• Operation costs
• Cash flow
• Customer retention rate

1. Sales Revenue

Sales revenue is the amount a business generates from selling goods or services before deducting any expenses. This metric helps business owners know if their business is profitable.

Taking a closer look at your inventory and sales trends over time can help small business owners understand their business better. You can find out your most profitable products and services, what times and seasons you tend to sell more. This can also help you know what products and services to promote and make more available and which ones are less profitable for you.

If you are a Prospa member, you can manage your inventory on the app through Business Hub. Prospa members also get a free online shop called webstore and weekly reports on the performance of different products.

2. Monthly profit and loss

To calculate monthly profit and loss, a new business owner might focus on total sales minus the cost of goods sold. This formula will not give you a true measure of your profitability, you should consider total revenue minus total expenses. This is why business owners need to be adept at tracking expenses.

Your expenses include your travelling expenses, logistics, cost of acquisition, monthly rent and more. In Nigeria, rent is usually paid annually but you can divide by the number of months you’ve paid for and ensure it’s being accounted for when calculating your monthly profit and loss.

3. Cost of acquisition

What does it cost you to get a new customer? Tracking this is vital for business owners who want to grow. Having the right product and finding the perfect market for it is great but if you are spending more to acquire customers than you are making sales, you will be running on red.

At the early stages of your business, your marketing costs might be higher than your revenue but there should be a timeline in place to ensure that changes. As your business grows, the cost of acquisition should reduce. To calculate your cost of acquisition, consider how much you are spending on marketing efforts eg your advertising expenses, salaries being paid to sales and marketing managers, even business meetings should be accounted for.

Monitoring your acquisition costs helps you determine whether your business will have long-term success. In addition, you need to match these costs with what is achievable within your industry. A digital business will need to track their digital ad spend on Google, Facebook etc and check the conversion rates. But a business owner who uses only traditional marketing mediums like word of mouth or flyers will need to create their own metrics for success.

4. Operation costs

You should have a clear understanding of your business operation costs. How much do you need to buy from your suppliers? What are your recurring and fixed costs? You need to be aware of these and be timely about payments to build a relationship with your suppliers. You want to keep operation costs as low as possible but still get excellent results.

Improving your operations might need you to build relationships with different suppliers to get better rates. If your rent is high, consider moving to a less expensive but still profitable location. Operation costs are not always fixed so you must keep an eye on it to maintain a balance.

5. Cash Flow

Staying profitable requires that you monitor cash flow in your business. Cash flow measures how much money is coming into your business versus how much is moving out. Cash flow can be positive or negative. Positive cash flow indicates that a company has more money moving into it than out of it.

Negative cash flow indicates more money going out than coming in which makes it tough to reinvest in your business. Late payments from customers can also cause negative cash flow so setting up an invoicing system for faster pay can also help to improve your cash flow.

You can mitigate improve your cash flow through an increase in sales revenue and a reduction in expenses and operating costs.

6. Customer retention rate

44% of businesses focus on customer acquisition, while only 18% focus on customer retention. This is despite studies showing that the probability of selling to an existing customer is between 60% and 70% while the probability of selling to a new customer is only between 5% to 20%. 

As a small business owner, it’s more beneficial to retain a customer than to keep finding new customers. For Prospa members, you can build a customer list to see who your high-paying customers are, your repeat customers, and create a foundation for excellent customer relationship management. You can keep track of which customers are repeat customers and set up a system to maintain the relationship.

How to monitor your business performance on Prospa

Monitor your business performance in one look on Prospa’s Business Hub located in your Prospa app. Business Hub provides data on your cash flow, sales revenue, best-performing products, top customers and suppliers.

How to use Business Hub on Prospa

Managing your financial operations on Prospa is quick and easy. Here’s how to use Business Hub:

• Download the free Prospa app on your Android or iOS device.
• Sign up for a free Prospa account and get a business bank account in 5 minutes or sign in to your existing Prospa account.
• Tap on the ‘Business’ button
• Select ‘Products’ to add your product or services

Also read: A comprehensive guide on Business Hub – Do Much More

You can now manage orders, track payments and get data that shows your business’ performance. As an entrepreneur, you should have goals that fit your business, and select metrics that match the results you expect. Tracking these metrics helps you monitor the performance of your business at different stages and guides you in making informed decisions that grow your business.