Defining Business Metrics: A Guide for Managers

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Businesses create data constantly. However, data is useful only if it is gathered and measured through business metrics. Identifying key business metrics can help a company make informed decisions for the future.  Learn where to start with business metrics and the cost of not defining them. We also provide some frequently asked questions. 

 

Related: How to Grow Your Business

 

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What are business metrics?

A business metric is a quantifiable measurement of some aspect of a business. Business metrics are also called Key Performance Indicators, or KPIs. Companies can use metrics in just about any aspect of their business. Some of the most common examples are:

 

  • Monthly profits: The total profits the company makes in a month.
  • Gross margins: The difference between the revenue from a product and the cost of making the product.
  • Overhead: The essential costs of running the business.
  • Monthly losses: The difference between revenue and costs.
  • Inventory: The amount of a product on hand.
  • Online sales: The revenue earned through online purchases.
  • In-store sales: The amount of money earned through in-person sales.
  • Sales revenue: The profits from product sales.
  • Productivity ratios: The product produced over the cost of creating the product.
  • Customer retention: The number of repeat customers over a specific period of time.

Business metrics help companies make informed, fact-based decisions about the direction of the company. Most metrics can be defined as financial metrics or non-financial metrics. 

 

Financial metrics

Financial metrics are often used to determine a company’s fiscal health. Financial metrics are shared internally and externally and are often expressed in the form of ratios, such as profitability ratios. Typically they are related to profits and costs. 

 

Non-financial metrics

Non-financial metrics are used to assess the effectiveness of business practices and procedures. Non-financial metrics help businesses see if managers and employees are working effectively and efficiently. An example of a non-financial metric would be a measure of employee engagement. Non-financial metrics are typically used internally.

 

Related: How to Create a Performance Improvement Plan

 

Where to start with business metrics

There are myriad business metrics a company can use. Selecting which metrics matter is a necessary step in using metrics to inform decisions. Consider the following when selecting the best metrics for your company:

 

  • What are the company’s financial objectives?
  • What are the company’s customer objectives?
  • How can we measure our financial objectives?
  • How can we measure our customer objectives?
  • What is the easiest way to track the metrics? 

The cost of not defining your business metrics

Some companies overlook using metrics or they use them ineffectively, which can have negative repercussions for the company. Here are some examples of the costs of not effectively defining your business metrics: 

 

  • Processes: It is challenging to measure the effectiveness of processes and procedures without metrics. You cannot know how effective a change in procedure has been if you did not take measurements before implementation and after implementation. 
  • Profits: Your company could be losing profitable opportunities. Metrics can help establish markets or target customers your business is neglecting from which you could sell more products. 
  • Knowledge: Metrics help you understand where your company is functioning well and where your company needs assistance. Without this knowledge, it can be a challenge to identify problem areas and remedy them. 
  • Loss: Your company may be losing money in a particular market. Without metrics, you might not realize the extent to which that loss is impacting your bottom line. 
  • Support: Without clear metrics explaining your decisions, stakeholders may lose confidence in your company and be unwilling to further offer support. 
  • Excess: Just as not using metrics can come at a cost, trying to use too many metrics can also hurt a company. Everything can be measured, but that does not mean everything should be measured. Carefully and wisely select the metrics that will inform your business’s growth and profits rather than attempting to measure every aspect of the business. 

 

The bottom line for business metrics

The bottom line for business metrics is that the right data is valuable. Consider what metrics might improve your sales, customer communication or other business aspects of value. Measure those items and then use that information to make informed and fact-based decisions. 

 

Frequently asked questions about metrics

Here are some FAQs related to metrics:

  • Which metrics should I choose?
  • Should I share my company’s metrics?
  • How should I track my company’s metrics?
  • Which industries should use metrics? 

 

Which metrics should I choose? 

Selecting the right metrics for your company will depend on factors like industry, goals, company size and location. See which metrics competitors in your field are tracking. If you know there are areas within your business for growth or assessment, add those to your metrics list. 

 

Should I share my company’s metrics?

Some metrics are useful for external and internal stakeholders to have, like quarterly profit reports for investors or customer satisfaction reviews for front-facing employees. Not everyone needs every metric, however. Choose which information you want to share by the relevancy to the audience and present it with context. 

 

How should I track my company’s metrics? 

Automated dashboards are the preferred way to manage metrics. These computer-based programs tally and track your selected metrics and make it easy to see data and run reports. Automated dashboards can be easily installed and maintained. 

 

Which industries should use metrics?

Every industry can benefit from the use of metrics. The type of metrics you choose depends on the company’s goals, industry and other factors. Consider using metrics top performers in your field are using.

 

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