Dozens of metrics and key performance indicators (KPIs) can help you understand your business's performance. Choosing which ones to pay attention to can be complicated. Timing matters, too — looking at some indicators weekly or monthly can give you a wildly different impression than if you tracked them on an annual basis.
To get a good sense of your company's health, analyze these five metrics annually. These numbers can indicate how sustainable your growth is and where there may be room for improvement.
Gross profit margin
Gross profit margin is your company's total revenue minus total costs, divided by total revenue. To turn it into a percentage, multiply by 100.
Ideally, your gross profit margin should be stable or growing. It indicates that your revenue is higher than your expenses. If your gross profit margin is negative or decreasing, it's a sign that you should cut costs, try a new marketing strategy, or fix something in your operations.
It's best to analyze the gross profit margin yearly. Tracking it from week to week or even month to month can be misleading, especially if you've made a big investment in new equipment or are trying a new sales strategy.
"If your gross profit margin continues to climb over time, it's a good indication that your business’s financial health is in good shape," wrote HubSpot.
[Read more: Small Business KPIs: What Are the Numbers That Matter?]
Customer churn
Customer churn is measured by dividing the number of customers you lost by the number of customers you had over one year, multiplied by 100 to get the percentage. Churn is a good indicator of customer retention — the holy grail of a growing business.
Customer retention is crucial for the long-term viability of your business. Simply increasing customer retention rates by 5% can increase profits by 25% to 95%; repeat customers spend 33% more than first-time customers.
Customer acquisition costs more than retention, too. Keeping your churn rate low can boost your gross profit margin and give your business a competitive advantage.
Ideally, your gross profit margin should be stable or growing. It indicates that your revenue is higher than your expenses.
Employee satisfaction
Your employee experience impacts recruitment, productivity, and morale — and a host of other business results that you may not even realize.
"MIT researchers found that companies in the top quartile of [employee experience] developed more successful innovations, deriving twice the amount of revenues from their innovations as did those in the bottom quartile — and their industry-adjusted Net Promoter Scores (NPS) were twice as high," wrote Harvard Business Review.
Employee satisfaction is a pillar of successful businesses and is worth measuring annually. Use the employee Net Promoter Score to get a sense of whether your workplace is thriving or heading for burnout. This score will tell you whether your team is engaged, satisfied, and validated by your company culture.
Customer lifetime value
Customer lifetime value (CLV) gives you an estimate of the financial worth of each customer.
"It measures how long it takes a business to recoup the investment in acquiring a new customer and retaining them. It helps identify the segments of customers who are most valuable," wrote The Fool.
Knowing your CLV enables you can make better budgeting, marketing, and hiring decisions. Likewise, CLV provides a high-level view of other key business metrics. Estimating your CLV requires knowing the average order value, average purchase frequency, gross margin, and the average customer lifespan of your customers. These are all helpful data points for making decisions across the company.
[Read more: The Best Metrics for Measuring Digital Marketing Success]
Cost of goods sold
The cost of goods sold (COGS) encapsulates all the costs and expenses directly related to the production of goods. This metric tells you how much things like materials and labor used to create the product cost year over year.
It can help you determine when to reevaluate your supply chain, change your pricing, or expand your workforce. COGS will also have a direct impact on your taxes.
"COGS is also tied to inventory management," wrote Shopify. "With an efficient system, you can reduce storage costs and minimize wastage, reducing COGS. Knowing COGS can improve purchasing, stocking, and production decisions."
Check on your COGS annually to account for inflation, supply chain disruptions, and ensure your business is running as efficiently as possible.
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