By definition business metrics are quantifiable measures that a business may use to monitor any number of business processes for success or failure.
In modern business the setting correct and useful metrics are critical and business should therefore consult with key stakeholders to determine what outcomes they are looking for from such metrics.
Metrics are also inherently different from KPI’s in that they are designed to track and quantify all areas of a business whereas KPI’s target specific areas to gauge performance.
Some of the more important areas where metrics can be used successfully are as follows:-
Sales Revenue: When correctly applied metrics will track revenue, the cost of producing the sales (COGS), the effectiveness of marketing and advertising, closing rates, and return on amounts investments in marketing and advertising.
Customer Service Index: In today’s business environment we often hear discussions about shareholder value but rarely do we hear much discussion about customer value. We find this somewhat mystifying as without customers shareholder value is zero.
We suggest that every company should establish a customer service index to better assist in the management and understanding of customer requirements. To do this you will need to develop metrics with which to measure customer satisfaction. This will also involve questioning the customers either directly or anonymously via regular surveys.
Motor manufacturers conduct these surveys regularly as dealers are rewarded on their CSI. This is a very effective tool for managing customer relations in a business.
Rate of Churn: This can apply to either staff, customers, and inventory and is an important indicator of the health of your business.
The correct metrics will tell you the rate of churn, where it is higher for staff and customers will indicate serious problems in the business, however, a high rate of churn or turnover for stock in a retail environment indicates good health in the business.
Once again collaboration with key stakeholders in setting the right metrics is essential.
Productivity Ratios: This is another key ratio that indicates a successful and profitable enterprise. Depending on your industry you can apply a number of metrics that will determine the level of productivity and more importantly how it can be improved as any improvement has an exponential effect on profitability.
As indicated the metrics depend on your industry and can be as simple as unbilled hours for a mechanic in a workshop to units of production per employee per hour in a manufacturing entity.
In the overall sense, productivity represents the underlying efficiency of your business. It is therefore important that when conducting a productivity review you need to asses to what extent automation can be implemented to both improve productivity, reduce costs, and human error.
Profit & loss: By definition, this of its own accord is a summary of many of the metrics that may be applied to a business as it is a key indicator to both fixed and variable costs.
These such as Cost Of Goods Sold are often expressed as a percentage of revenue which, depending on your industry will be a good indicator of your ultimate operating profit.
Some of the key ratios that can be derived from the profit and loss accounts are:
Overhead Costs: These are often referred to as fixed costs and encompass some key data including payroll, rent, advertising and marketing, light power, and heating and insurance costs which are all significant costs in an enterprise.
Once again these items will be measured as a percentage of turnover and you should check your industry standards for the right metrics to apply to your business.
Variable Costs: These are costs that will vary up and down in proportion with fluctuations in sales revenue. Some examples of these costs are as follows:
The amount of these variable will vary from industry to industry, for example, a retail store may not have high transport costs as customers normally take their goods with them whereas a manufacturing enterprise normally delivers its goods so has a high delivery cost.
Industry standards for these variables will vary from industry to industry so you need to check your industry standards for the right metrics to apply to your business.
Inventory Size and Turnover: Stock turn ratios again will depend on industries but are also a key measure of the health of a business and may vary widely for example in the fast-moving consumer goods area (supermarkets and similar) you may have up to 30 stock turns a year whereas in the manufacturing area you may expect around 6 stock turns per year.
Unused Hours: This mainly applies to service or professional industries such as accounting and legal but as indicated above it can also include such industries as mechanical workshops.
Importantly in this area, one should not expect any employee to be logging 100% of their time as billable.
Depending on the industry a target of 80% to 85% would be acceptable however some will aim higher or lower.
From a productivity point of view, this is a key metric, and once the percentage of billable hours is set it should be monitored on a regular basis.
Conclusion: Setting the right metrics with which to monitor, measure, and improve your business is an essential part of best practice management.