Every business owner or high-level executive should know the current value of their business — or at least a close approximation.
Key Performance Indicators (or KPIs) are the essential business metrics that define the value of your company. In other words, to know your value, you need to focus on your KPIs.
However, there are literally hundreds of different KPIs you can track. So which ones matter most? Which ones are best for company valuation? In this guide, we’ll explore six of the most important KPIs:
- Sales Revenue
- Net Profit Margin
- Gross Profit Margin
- Customer Retention Rate (CRR)
- Market Share
- Website Traffic
While your most crucial value metrics may vary depending on your industry and other factors, these are among the most common KPIs used to measure business growth and overall value. They’re universally recognized among most economists and investors, so it’s essential to understand their applications and definitions.
Sales Revenue
Revenue is the overall income a business earns, but sales revenue only accounts for the sale of goods or services. Because other sources of revenue (such as dividends or interest) don’t directly link to a company’s expertise or industry, these types of revenue generally don’t give an accurate view of business growth.
For nearly all industries, sales revenue is a much more accurate KPI that shows the gross income a company makes within a specific time period. You can find this information on your income statement when reviewing financial reports.
Net Profit Margin
While your sales revenue shows your overall income, your net profit margin gives a clearer view of your actual financial status. Your net profit takes your total revenue and subtracts your expenses. The resulting income is your net profit.
Net profit margin is the ratio of your net profit to your overall revenue, measured as a percentage.
This KPI is essential because it shows how well your business generates a profit based on the total income you make in a given time period.
Gross Profit Margin
Your gross profit margin is similar to your net profit margin. It’s the difference between your net sales revenue and your cost of goods sold (or COGS). It shows how well your business retains capital for each dollar of sales.
As with net profit margin, the measure for gross margin is a percentage. These two business metrics are “profitability metrics,” and together they give a clear picture of how well your business generates profits. Many investors consider profit margins more important than other performance metrics.
Customer Retention Rate
So far we’ve reviewed business metrics relating to income and profitability. However, there are other KPIs that measure the value of a business.
Customer retention rate (or CRR) is one KPI investors often use for a company valuation. This business metric refers to the number of customers a business retains over a specific time period. It’s a fairly accurate measure of customer loyalty, which is an important aspect of any company valuation.
While most investors won’t rely too heavily on a strong customer retention rate, it’s an important part of a full evaluation, and a poor customer retention rate may predict a future decline in revenue.
Experts agree that it’s almost always less expensive to retain current customers than to acquire new ones. A strong customer retention rate helps keep these expenses in check and can be a significant contribution to a company’s bottom line.
Use the following formula to find your customer retention rate.
Customer Retention Rate = ((EC-NC)/SC) *100
EC = Customers at the end of the period
NC = Number of new customers during the period
SC = Number of customers at the beginning of the period
Market Share
Market share is another KPI that’s essential in most organizations’ valuation efforts. Market share measures the percentage of the market dominated by a specific business, and clearly reveals the strength of a business model when compared to other companies within the same industry. Even if other KPIs are weak, market share may show a company’s potential.
To find your market share KPI, find your sales revenue over a specific period and divide by the total industry sales revenue over the same period. Whichever company holds the largest market share can claim the title of market leader, which is a major leverage point for any investment negotiation.
Website Traffic
With so many consumers starting their customer journey via online searches, measuring website traffic on a month-to-month basis is also an important KPI than can be indicative of how your company is faring. An increase in website traffic can directly affect sales growth if you successfully convert leads. Likewise, it can also be a strong indicator of customer loyalty and retention.
However, a drop in website traffic is usually a clear sign that something has gone amiss — perhaps your marketing efforts need to be stepped up or maybe your reputation has suffered due to poor engagement or negative reviews.
The great thing about this KPI is that it is relatively easy to measure. You can use Google Analytics, a free tool that provides a wealth of information, enabling you to not only monitor website traffic, but also where the traffic comes from. This information can help you find areas that need improvement, enabling you to improve company and sales growth.
Final Thoughts
While this isn’t a completely comprehensive list of all the KPIs you may use during a company valuation, it’s an excellent start. If you would like more information or expert guidance, book a discovery call with one of the business advisors at the Association for Enterprise Growth. During this call, we can identify your pain points and other areas that require support. We can work together to establish a plan for your business growth and connect you with the appropriate resources.
Image Credits: Photo by Lukas Blazek on Unsplash
