Business metrics and ratios play a crucial role in helping you understand the financial well-being of your company. They assist you in navigating the complicated world of finance by acting as a compass and map, guiding you to make wise decisions and grow your company.
I can already imagine your initial thought: “Business metrics and ratios sound complicated.” But fear not—an integrated finance management platform will help with that! Our platform aims to simplify finance management.
We have you covered for everything from financial metrics and ratios to business success, allowing you to concentrate on one thing you do best—growing your company.
Let’s understand the realm of key financial metrics and ratios in accounting and learn how they might support the success of your company. Stay tuned for some insightful information that will enable you to handle your finances effectively!
What Are Business Metrics?
Business Ratios and Metrics are quantitative measurements applied by companies to identify and analyze performances. This enables businesses to analyze and understand how the business is performing.
Such metrics are compared against its own expectations, standards, benchmarks, industry peer standards, or accepted business yardsticks, or some or all of them. This will guide the businesses to take necessary actions to pursue the operations. Thus, businesses reach the level of the best-performing companies in the industry.
The ratios and metrics benefit businesses by letting them know the level of their performance in each area. Thereby, helping them to identify the problems that are challenging for the business.
Important Types of Business Metrics
There are numerous business metrics and ratios available for use. While some are generic, some are useful for specific industry segments. The businesses must identify the most suitable measurements for their business. This is in terms of industry norms and company-specific requirements. However, it is not to spend time without getting any value from the exercise.
Here are some of the popular and widely used metrics:
1. Financial Metrics
1.1 Working Capital and Current Ratio
Arguably, financial metrics are the most popular and widely used metrics and ratios used in businesses.
These metrics measure liquidity, a test of how fast a company can convert its assets into cash to meet short-term liabilities. The working capital is the difference between the current assets and current liabilities of the company and is an indicator of its capability to pay its current liabilities with its current assets.
The current ratio >/= 1, points to a healthy liquidity position.
The current ratio < 1, points to an unhealthy liquidity position.
1.2 Quick Ratio
This is a more intense measurement of liquidity and therefore, also called acid ratio. It measures a company’s ability to pay all current liabilities with current assets that can be liquidated quickly.
Quick ratio = 1, a positive signal.
Quick ratio < 1, a negative signal.
1.3 Debt-to-Equity (D/E) Ratio
Debt-to-Equity (D/E) Ratio is calculated by dividing total liabilities by total shareholders’ equity. This measures how much-borrowed money (debt) is used to fund the company’s operations and the extent of coverage of debt by shareholder equity when needed.
A capital structure with too much debt and as well very little or no debt is not necessarily the best financial management practice. It is important to look at the capital structure from the cost of capital, leverage, and risk angles.
This ratio also gives insight into the impact of debt ratio on fixed finance costs and earnings available for dividends.
1.4 Earnings Before Interest, Taxes, Depreciation, and amortization (EBITDA)
One of the most widely used profitability measurements in a variety of company choices is EBITDA. This is calculated by deducting from net income the non-cash amortization and depreciation expense, taxes, and debt service costs.
It is therefore equal to the monetary profit that the business’s operations generate. Nevertheless, the majority of accounting standards, including IFRS and GAAP, do not recognize EBITDA as a statistic.
1.5 Return on Equity (ROE)
The return on equity metric tells how effective and profitable the shareholder equity is used by the company. The net income used for this calculation is the income before paying dividends to common shareholders, but after paying preferred share dividends.
1.6 Net Profit Margin
The difference between a company’s real profit and its revenue is measured by its net profit margin. Since increased sales do not always translate into greater profitability, this statistic is crucial.
The formula for net profit margin is: Net profit margin =
(Net Income / Total Revenue) X 100
1.7 Gross Profit (GP) Margin
Before subtracting costs, a company’s profits are taken into account by GP Margin. This covers interest, taxes, amortization, depreciation, and running costs such as rent, utilities, salaries, and marketing. It shows whether a company is making enough money on gross profit to pay for all of its operating costs.
The formula is:
(Revenue – Cost of Goods or Services Sold) / Revenue.
1.8 Accounts Receivable Turnover Ratio
This ratio measures how effectively the business invoices its customers for the goods or the services delivered and collects payments for the invoices from its customers. A higher ratio indicates the company’s collection process is effective and vice versa.
The formula is:
Accounts Receivable Turnover Ratio = Net Credit Sales in a Given Period / Average Accounts Receivable of Period
1.9 Percentage of Accounts Payable Overdue
A high percentage of overdue payables means the company has a cash flow problem in settling payments to suppliers and other creditors. This can impact the business in the form of disruptions in supplies and services.
A lower percentage means the company is paying its suppliers and creditors on time.
The formula is:
Accounts Payable Overdue Rate = (Accounts Payable Overdue / Total Accounts Payable) X 100
2. Sales Metrics
Sales metrics are used to evaluate the performance of a salesperson, sales team, or the company as a whole. It provides insights into what actions need to be taken to improve the performance of sales activities and teams.
Here are a few key sales metrics businesses must track.
2.1 Net Sales Revenue
The types of sales revenue metrics to track in a business vary depending on multiple factors, like the business model, revenue and billing model, the industry, regions it operates, and the company and organization structure, among many others.
It is calculated by using the formula:
NSR = Gross Sales – Discounts – Returns – Costs Associated With Discounts and Returns
2.2 Growth Rate
Every company wants to know its year-over-year (YoY) growth, which is an important sign of the overall health of the business. The metric compares the business’s growth rate with industry benchmarks and the company’s previous revenue, to know how well or how badly the sales team is performing.
The formula used for calculating the metric is:
Growth Rate = (Current Year Revenue – Previous Year Revenue) / Previous Year Revenue * 100
2.3 Churn Rate
The churn rate calculates the percentage of customers who leave or stop doing business with a company. This metric points to a sales team’s ability or inability to retain customers.
The formula used for calculating the metric is:
Churn Rate = Number of Customers Lost During Period / Starting Number of Customers at Beginning of Period X 100
3. Marketing Metrics
It is critical to what combination works best by measuring the impact on revenue increase.
3.1 Cost per Lead (CPL)
Understanding how much it costs to onboard and retain a customer is an important marketing metric that will help in developing marketing strategies.
CPL = Total Marketing Spend / Number of New Leads
3.2 Customer Acquisition Cost (CAC)
This is one of the most popular marketing measurements that consider all marketing and sales costs including sales team salaries, and benefits to the ad spend.
Customer Acquisition Cost = Total Marketing and Sales Spend / Number of New Customers
3.3 Customer Lifetime Value (CLV)
This metric calculates the total profit earned by the company from a customer over the entire time they remain a customer.
This is calculated by applying the formula:
Clv = (Average Transaction Value * Average Number of Transactions in a Year * Average Customer Retention in Years) * Profit Margin
3.4 Customer Retention
This brings home the percentage of existing customers who remain during a specific period.
The formula is:
Customer Retention = (Number of Customers at End of a Period – Customers Added During the Period) / Number of Customers at Beginning of the Period
3.5 Return on Marketing Investment
This is a metric that points to the profits from incremental sales that are contributed by marketing activity. It gives insights into the value each marketing activity generates and also understands which mix of channels performs well and which doesn’t.
You will get the Return on marketing investment by applying the formula:
Return on Marketing Investment = (Sales Growth – Marketing Cost) / Marketing Investment X 100
4. SaaS Metrics
While some marketing and sales metrics like churn rate, customer lifetime value, and customer retention are relevant or specific to SaaS business models, other metrics are used mostly by SaaS companies.
Such metrics that can provide actionable insights for SaaS companies include
4.1 Monthly Recurring Revenue (MRR)
This is a key metric used by SaaS companies to measure the total revenue expected to be received in a month. MRR is calculated by adding the total revenue from paying customers in a given month.
This has a few modified versions like
- New MRR – revenue from new customers
- Expansion MRR – revenue from upgraded customers
- Churn MRR – revenue lost from lost customers.
4.2 Average Revenue per Account (ARPA)
Also known as annual revenue per unit (ARPU), this metric measures the average revenue generated by each account.
The formula is:
ARPA= MRR/ Total Number of Customers in that Month
5. Human Resources Metrics to Track
Human resources metrics and ratios help companies look at talent attritions, their impact on business, and the effectiveness of their recruitment process. Additionally, it also focuses on the influence of company culture, and training.
Some important HR metrics include:
5.1 Employee Turnover Rate
High attrition rates can reflect on talent management, unhappy workers, or recruiting employees.
Turnover Rate = (Number of Separations in a Given Period / Average Number of Employees in Period) X 100
5.2 Employee Net Promoter Score (eNPS)
eNPS measures the probability of an employee recommending their company to others as a place to work, or its products to family or friends. The formula is
eNPS = Percentage of Promoters – Percentage of Detractors
5.3 Career Path Ratio
This metric helps track the ratio of vertical promotions to lateral transfers. The formula is:
Career Path Ratio = Total Promotions / (Total Promotions + Total Transfers)
6. Market Investment Ratios to Track
6.1 Earnings per Share (EPS)
Earnings per share (EPS) tracks the profitability of a company to enable investors to use it to gain an understanding of company value, before investing in a company.
EPS = Net Income / Weighted Average Number of Common Shares Outstanding During the Year.
6.2 Price-Earnings Ratio (P/E)
It indicates the money investors would pay to buy shares from the market if they receive $1 of earnings.
To calculate the
P/E Ratio = Company’s Current Stock Price / Earnings-Per-Share.
7. Other Business Metrics to Track
There are a lot more metrics and ratios that matter to and are used by businesses and functions within an organization. We will touch base on a few more of them that can be useful for the C-suite, operations teams, and other business departments in manufacturing and other industries.
- Revenue vs. Forecast: Analyzing the deviations of actual performance from forecasted outlook, using the formula:
Variance Percentage = ((Actual – Forecast) / Actual) x 100
- Inventory Turnover Rate: An important metric for businesses that manufacture or trade in goods, this tracks how many times a company sells and replaces its inventory over a given period.
Inventory turnover rate = (Cost of Goods Sold / Average Inventory) x 100
- Return on Assets (ROA): This measures what profit a company makes on its investments in assets.
Return on Assets = Net income / Total Assets
- Average Support Ticket Resolution Time and Customer Satisfaction: Like employee satisfaction, these metrics matter a lot in retaining customers.
Final Thoughts
Although it may seem difficult, understanding business metrics and ratios is crucial to maintaining the direction of your company. These figures are more than just numbers on paper. They’re your company’s lifeblood, letting you know how it’s doing and helping you make decisions.
You’re giving yourself the power to make wise decisions and lead your company toward success by closely monitoring these financial metrics and ratios.
However, we are aware that keeping track of all these metrics might be daunting. Here’s where Paci.ai gets involved! The goal of our bookkeeping service is to make financial management easier. Our team of experts can handle everything from taxes to bookkeeping, giving you the peace of mind to concentrate on expanding your company. As a result, you can simply keep an eye on your business metrics and make data-driven choices in one convenient spot.
So, connect with us right now for more exciting information on financial management!