Career Development

10 Key Metrics You Should Incorporate in an Effective Business Plan

February 22, 2021

In order for a company to become successful, it needs constant monitoring and maintenance. You can set up key metrics in a business plan to ensure that relevant data is being tracked, which allows you to identify potential issues and develop effective solutions. In this article, we explain the importance of including performance metrics in a business plan and list some of the key metrics that you should use to track your company's growth.

Related: What To Include in a Strategic Business Plan (With Template)

Why are metrics important in a business plan?

Metrics, also known as key performance indicators or KPIs, allow you to track the growth and performance of a business. This information is vital because it enables you to monitor the company's progress toward its goals as well as spot and address potential issues before they arise. The business metrics you choose to utilize really depends on your organization's unique goals. Here are some of the key metrics for a business plan:

1. Sales revenue

Perhaps one of the most informative business metrics is revenue. By evaluating your company's sales, you can gauge how its products or services are performing in the marketplace and whether your marketing efforts are successful. You can determine an organization's sales revenue by adding up the income from sales and then subtracting any costs associated with undeliverable or returned products:

Sales revenue = sales income - returned products

Related: 4 Examples of Key Performance Metrics to Track

2. Net profit margin

The net profit margin evaluates a company's ability to generate a profit in contrast to its overall revenue. Using this metric, you subtract all of your company's sales expenses from the monthly revenue to determine just how much profit was earned:

Net profit margin = monthly revenue - sales expenses

Put simply, the net profit margin allows you to compare the company's income with the costs associated with running the business so that you can effectively predict long-term growth. You can improve an organization's net profit margin by either increasing revenue or by lowering the costs of production or sales.

3. Gross margin

A company's gross margin measures how much of each sales dollar goes toward profit and other costs. This number is expressed as a percentage and is calculated by subtracting the cost of goods from the total sales revenue and then dividing that number by the total sales revenue. When a company has a high gross margin, it signifies that a majority of each sales dollar is retained. Here's a closer look at the formula:

Gross margin = (overall sales revenue - cost of goods sold) / overall sales revenue

This metric is especially important for newer companies because it often reflects the efficiency of the organization's overall productivity and processes.

4. Lead conversion rates

This metric helps you determine how many of your leads, or potential customers, decide to purchase your product or service. Leads can be converted by a combination of several variables, such as:

  • Quality products
  • An excellent sales staff
  • A well-designed website
  • An appealing social media presence
  • Great customer reviews

Using this information, you can identify which variables are preventing leads from becoming customers. In order to calculate a company's lead-to-client conversion rate, use this formula:

Conversion rate = new leads per month/number of new customers per month

5. Website traffic

Measuring the number of visitors to your organization's website each month is a great way to gauge the success of your marketing efforts and the company's overall reputation. There are a variety of marketing tools available that allow you to track your website's monthly traffic in addition to the sources of these visits. This data allows you to understand how people are finding your company and site. You can improve your website traffic by:

  • Increasing the budget for marketing and advertising.
  • Improving the site's SEO.
  • Enhancing the company's social media presence.
  • Securing press coverage.

Related: 16 Examples of KPIs for the Workplace

6. Retention rate

Fostering brand loyalty is imperative in any industry. Aside from leading to repeat purchases, great customer retention often results in customers that tell others about your company's services or products, resulting in even more sales. If you're hoping to increase brand loyalty, you must first deliver quality services and/or products, but providing excellent customer service is another important component. You can calculate a company's retention rate using this formula:

Retention rate = ((total number of customers at the end of a specific time frame - the number of new customers the company acquired during that time) / the total number of customers at the beginning of the established time frame) * 100

7. Customer acquisition cost

Companies usually acquire new customers through marketing initiatives, which cost money. This is known as the cost of customer acquisition, customer acquisition costs or CAC. You can calculate a company's customer acquisition costs by dividing its marketing expenses for a specific period of time by how many clients were acquired during that time frame:

CAC = marketing costs / customer acquired

8. Customer lifetime value

Though finding a company's cost of customer acquisition can be helpful on its own, it is especially enlightening when compared to the customer lifetime value, also known as CLV, customer lifetime revenue or CLR. This metric shows you just how much revenue you can expect to earn from a typical customer. Calculating a company's customer lifetime value takes a fair amount of data.

The method for determining a company's CLV varies depending on the sales model, but you can generally find it by multiplying the value for an average sale by the retention time for a typical customer (in months) and the number of transactions they usually generate in that time frame:

CLV = average sale * retention time per average customer * typical number of transactions per customer each month

The customer lifetime value is so vital because it allows you to:

  • Understand how much the company can afford for customer acquisition.
  • Evaluate issues that are diminishing customer retention.
  • Identify customer segments that bring in a higher profit or are too difficult to convert.

9. Employee satisfaction

Employees are a company's most valuable asset because they determine the organization's overall success. That's because when employees are happy, they tend to be more productive, which then contributes to the company's profitability. By regularly measuring employee happiness through feedback and surveys, you can ensure that team members are satisfied with the company and its role.

10. Progress toward goals and deadlines

Regardless of the industry, every business has goals and deadlines that can then be broken down into milestones. You can track the number of milestones that are met and overdue to gain a better understanding of the company's capacity for production. This information could give you insight into potential issues, like:

  • Low productivity
  • Lack of resources
  • Unreasonable expectations
  • Insufficient staffing

By recognizing the problem, you can then develop effective solutions that improve the company's overall efficiency and success.

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