7 Key Metrics in Business You Should Track Monthly to Increase Profits
What if you could grow your business while saving yourself the frustration of spending time on activities that don’t contribute to your bottom line?
If you’re like most small business owners, you’re great at serving your customers and clients through your work. But when it comes to the financial side of your business, you may find it downright intimidating to look at the financial numbers in your business (besides an occasional peek at your business bank accounts). And if that’s the case, you’re not alone.
Over decades of working with business owners to maximize their profits, I know how overwhelming it can be to figure out which metrics in business you should be tracking consistently.
So out of all the numbers you could be looking at, I’ll help you simplify it to the ones that move the needle in helping you have a profitable business. As you get comfortable with using the 7 key metrics in business below, you’ll feel empowered with insights that’ll help you:
Know whether you’re making progress in your business or not
Fix bottlenecks that are keeping your business from making a bigger profit
Feel confident as you make important business decisions based on solid data
And the good news is that understanding key metrics in business doesn’t have to be complex. It can actually be fun…there’s no need to memorize dozens of formulas to be a financially competent business owner!
What Are Metrics in Business?
In business, metrics are simply a tool to measure the result of certain processes and actions over time. You can use metrics to measure every aspect of your business - from the big-picture of your profit & loss statement to the details of how your last social media post contributed to an increase in website traffic.
Measuring things in your business gives you the power to track where you started, where you are now, and what gaps you must close to achieve the goals you set. When you measure things consistently (such as monthly), you’re empowered with the information to make changes to your business as needed.
So what are the 7 most important financial metrics in business you should know? Let’s uncover each and help you understand how you can start tracking these to improve your profitability faster.
Key Business Metric #1: Revenue
How much income is your business generating from sales? This is your revenue.
Revenue is the amount you’re bringing in from sales after you subtract any refunds. Some key revenue-driving activities in business typically include lead generation, marketing, and sales.
Out of all the financial metrics in business, revenue is the foundation that supports the health of your business most. The more sales you make, the higher your revenue. The higher your revenue, the higher the possibility of increasing your profit and being able to withstand business challenges.
How Do You Measure Revenue?
If you use accounting or invoicing software such as Quickbooks, you should be able to see your revenue on your Profit & Loss statement. If you’re tracking everything on spreadsheets or on paper, look at the payments you’ve received from customers in a given time frame (such as one month).
As you track revenue, make a note of revenue growth from month to month. Depending on the nature of your business, you may notice a seasonal pattern in your revenue. Knowing this pattern can better help you manage cash flows.
While it’s great to see your revenue going up over time, it doesn’t always mean that your profits are going up too. Because the next most important metric to track is your expenses. And that starts with COGS.
Key Business Metric #2: Cost of Goods Sold
When you make a sale in your business, there’s generally a cost that can be tied directly to that sale or project. This is called Cost of Goods Sold (abbreviated as COGS). This number can also be found on a Profit & Loss statement in your accounting software.
In a service-based business, a bulk of this might be the cost of labor or any materials or software you needed to purchase to specifically complete that project.
Let’s say that you need to outsource a certain task in your latest client project to a contractor. The investment in hiring the contractor would become part of your COGS. Or perhaps you need to buy an office item just for one particular project. Since that item is not tied to running your business for every client or project, it’s a better way to gain insight into how much it costs you to generate a dollar of revenue for that project.
Understanding how much it costs to generate revenue each month, you’ll be able to make adjustments as needed to reduce your COGS. This can lead to a higher gross profit — one of the 7 most important key metrics in business to track.
Key Business Metric #3: Gross Profit
Now that you know your revenue and COGS, it’s time to look at the even more exciting stuff — your first indicator of profit! Gross Profit is the difference between your revenue and your Cost of Goods Sold (COGS). Simply subtract your COGS from revenue to arrive at your gross profit amount.
The gross profit shows what your business is making before your operating business expenses are deducted (more on those below). The gross profit represents the amount of money you can use to invest back into your business, hire more people to help with overall operations (such as an assistant or a bookkeeper), improve your business skills, or pay for general business expenses.
You should be able to find this number in your accounting software, typically listed right under the COGS in your Profit & Loss statement. Once you know your Gross Profit dollar amount, you’ll be able to translate this into your Gross Profit Margin so you can use it to make better business decisions.
Key Business Metric #4: Gross Profit Margin
While gross profit shows the dollar amount you’re making after COGS are subtracted, Gross Profit Margin is expressed as a percentage of revenue. This percentage (or ratio) allows you to measure and track progress over time easily in relation to your revenues as your business grows.
Example of business metrics in action — Gross Profit Margin
Let’s say you had a $50,000 gross profit in both of the last two months. If you made $100,000 in revenue in one month and $200,000 the next month, which month was better?
Looking at the dollar amount of your gross profit alone doesn’t tell you much. It might look like both months were the same since your gross profit was $50,000 in each month…
And that’s where Gross Profit Margin comes in to simplify your life! By dividing your Gross Profit by the Revenue for each month, you’d see that the first month generated a 50% Gross Profit Margin while the next month was a 25% Gross Profit Margin!
Key Business Metric #5: Operating Expenses
If you’re like most businesses, you probably have a lot of business expenses in your business that can’t be traced directly to any one particular sale or project. These broader business-level expenses are known as your operating expenses.
Operating expenses are needed to keep the lights on and run your overall business on a day-to-day basis.This includes costs like rent, phone and internet bills, website maintenance, licensing and registration fees, continuing education and training, business coaches and consultants etc.
Looking at your operating expenses monthly helps you better evaluate which ones you may be able to cut down or eliminate as your business grows.
Key Business Metric #6: Net Income (Profit)
Ah, finally! The one that we all work so hard for - the net profit! Also known as “the bottom line,” your net income (or profit), is what’s left over after you’ve subtracted all of your expenses from your revenues.
The formula for your Net Income (Profit) is as follows: Gross Profit - Operating Expenses.
Tracking your profit over time allows you to notice trends. If something’s off and your business profit isn’t growing, you can look deeper at the items above to make changes as needed. Are your revenues lagging in comparison to last year? Has your COGS shot up in the past few months? Do you know where the biggest chunk of your operating expenses is coming from?
Looking at these metrics allows you to re-assess and re-evaluate where you might need to focus more (or less) of your resources to increase your profitability.
Key Business Metric #7: Net Profit Margin
Just like the Gross Profit Margin above, Net Profit Margin is also expressed as a percentage of revenues (rather than a dollar amount). The Net Profit Margin allows you to clearly see whether your net profit is growing as your revenues grow.
To arrive at your Net Profit Margin, you look at your Net Income (Profit) and divide it by your revenues. You may also hear the Net Profit Margin referred to as your Profit Margin Ratio - both are the same thing.
Example of business metrics in action — Net Profit Margin:
Let’s say your revenues last month totaled $300,000. Your net income (profit) was $100,000. Your net profit margin was 33% ($100,000 divided by $300,000).
What Happens When You Don’t Understand Key Metrics in Your Business?
Without taking the time to understand key metrics in your business, you’re missing out on being able to use data that can help you make strategic decisions faster.
When business owners aren’t comfortable with the key metrics in business that indicate profitability, they often end up feeling exhausted with little to show for it or burnt out with cash in the bank but stress levels through the roof.
They can unintentionally end up making rash, impulsive, or emotional decisions they later regret. This leads to losing money or damaging their mental, emotional, or physical health. But now that you understand which key metrics to track in your business, you’ll be equipped to notice trends that can help you plan better, save time, and earn more money.
Wondering what average net profit margins are in businesses that are similar to yours? While the range of margins can vary drastically between different types of business, you can view a list of average industry profit margins here (published by NYU Stern in January 2023).
How Can You Make Tracking Metrics in Business Easier?
So if there were only 7 metrics in business that you keep a close eye on every month, they should be:
Revenue
Cost of Goods Sold (COGS)
Gross Profit
Gross Profit Margin
Operating Expenses
Net Profit
Net Profit Margin
If that sounds like too much to keep tabs on, don’t worry. Nowadays, most accounting or financial business software (like Quickbooks) will do it for you! Five of the numbers above (in bold) actually make up your Profit and Loss statement!
But what about Gross Profit Margin and your Net Profit Margin? You can absolutely calculate these numbers on a spreadsheet. But this can be time-consuming and still leave you with a bunch of numbers to look at without knowing what to do about them.
That’s where Metrique comes in to save you time and help you make better business decisions without the hassle of spending hours in front of spreadsheets every month.
Watch a demo to see Metrique in action as it provides beautiful visuals to track all 7 of these key metrics for your business every month, quarter, and year. So you can feel more confident and at ease about growing a healthy business without being overwhelmed by the numbers!
🎧 Listen to our podcast on how Metrique can become your financial partner in improving profitability by seamlessly pairing with your current business accounting or financial software. (Whether you’re already using an accountant/bookkeeper or not!)