Whether your business is dedicated to maximizing profits for stakeholders or generating funds to support your mission, there is no denying that financials are the pulse of your business. So next time you find yourself channeling Tom Cruise in Jerry Maguire
Think about how data can help you. Below are a small selection of useful financial metrics to get you started.
Revenue and Revenue Growth Rate
Revenue is the top line of an income statement and is simply the money generated through your business activities. This is a valuable metric to track, showing how your business is growing, and can also be expressed as a growth rate using this formula:
Profit and Profit Margin
Profit and Profit Margin can take the form of gross and net. Gross profit is the easier metric to calculate, as it is simply your revenue minus your cost for the items or services sold. In contrast, Net profit requires subtracting the total cost of doing business, including overhead, taxes, salaries, etc. Once you have profit calculated, calculating profit margin is simply a matter of diving the profit by revenue, times 100:
The revenue and profit metrics can be displayed as a snapshot in time or longitudinally using a line graph.
Revenue per Square Foot
This can be an extremely powerful metric in a brick-and-mortar retail setting. At its most basic, this metric can be calculated by taking the total revenue for your store divided by the total square footage of your business. In retail chains, this is often used to compare one site's performance to another, but for small businesses, this tool grows particularly powerful when used to analyze the performance of store areas. For example, let’s say you own a clothing store that is 2,000 square feet, with a monthly revenue of $100k. In this case, your revenue per square foot is $50. This can now act as a baseline to compare the different areas of your store. If your women’s suit section takes up 200 square feet and has $15,000 in revenue, it is generating $75 per square foot and is a good use of the space. However, if the men’s accessory area is only generating $25 per square foot, it would be underperforming, suggesting that you may want to devote less retail space to it.
One drawback to Revenue per Square Foot is that it doesn’t necessarily translate to profitability. For example, in an electronics store, computers and cell phones may have the highest revenue, but the markup may only be 5 to 10%, while the accessories may have a 50% or higher markup. If the computers have a revenue of $50k, they may only have a profit of $2,500; meanwhile, if the accessories have a revenue of $10k, they could have a profit of $5,000, making them the more profitable area.
This is why, though it requires more work, we recommend that small businesses look at Gross Profit per Square Foot as well as Revenue per Square foot, as it doesn’t make sense to stop carrying the items that make your store more profitable, even if they don’t contribute as much to your revenue.
A treemap visualization can be a good way to visualize these metrics.
A word of caution, however. As with all metrics, revenue, and profit per square foot only tell part of the story. Before you stop carrying an item, look at who buys them and with what. If your best customers come to you because you are the only one that carries a particular item, it wouldn’t make sense to stop carrying it. Also, if the item is frequently bought with other highly profitable items, it might be worth holding onto it for those big sales, even if it doesn’t sell well overall. It is worth noting that these metrics mainly apply to brick-and-mortar-only stores. They can still be used for an omnichannel business model, but care must be taken to ensure that online sales are kept separate from in-store if your website offers more than what you have on hand.
Revenue and Profitability at the Staff Level
Finally, it is worth looking at which of your sales or service staff generate the most revenue and are the most profitable. As discussed in Starting Your Data Journey, these are not targets for your team but a prompt to ask more questions. Who are your high performers, and what makes them different than the rest of your staff? What can they teach the lower performers? Who is underachieving, and what barriers are they facing that you can help remove?
These are a small sample of possible financial metrics that won’t apply to all businesses. However, I hope you can see how powerful they are and that you are thinking about how they can be used or modified to meet your needs.
Next week we will discuss staff metrics.