April 12, 2022
As a small business owner, you have a lot on your plate. And never enough time to do it. When it comes to collecting data and reporting on business KPIs, it only makes sense to focus on those that will make your life easier by driving revenue with smart decisions. Not reporting for the sake of reporting.
What data should you track for maximum impact on profitability and minimum effort on your part? In this article, we cut to the chase and disclose 5 crucial metrics to track as an SMB. They are:
No time to waste, let’s roll.
We start with the most basic business metric, sales revenue. Out of the metrics explored in this article, it’s the easiest to calculate and very common to report on.
Sales revenue is the income generated from selling products or services, typically calculated per month or quarter. It’s a measure of success or failure on the part of the sales and marketing teams rather than profitability per se (more on that later).
If your small business sells products, sales revenue is calculated by multiplying the number of products sold by the average price per product. If you’re a service-based business, then your sales revenue will be calculated by multiplying the number of won customers by your average check.
When talking about revenue, we can distinguish between gross and net revenue. Net profit would, therefore, mean gross (total) profit minus operating expenses and taxes.
This is where the conversation becomes more nuanced as it’s not enough to sell products or services and generate revenue. The other key part of ensuring profitability is keeping your operating expenses, taxes, and other deductibles below your total generated revenue.
When it comes to small business operating expenses, the most costly resource is time purchased from people. SMB owners who understand that and take measures to optimise their employee time usage are more successful in keeping operating costs low as compared to revenue generated, i.e. consistently growing net profit.
Picking up on the topic of time data, we have to talk about employee utilisation. While it is true that this metric originates from service-based businesses using the hourly billing model, its application is much wider when we think about time being the largest and most costly resource for many SMBs.
Traditionally, the thinking behind calculating utilisation is understanding how much of employees’ time is dedicated to revenue-generating tasks, most often measured in billable hours divided by the total number of hours purchased from employees per week or month.
However, the concept of utilisation doesn’t have to be limited to billable utilisation. Not all companies bill clients based on the number of hours and hourly rates, but all companies benefit from understanding how busy their employees are. For example, utilisation data can be used to determine which teams are overworked and need more resources. Or which employees can be given more orders or tasks because they have the capacity for that.
Utilisation is a tricky metric because it needs sensitive time data and full cooperation from your team. This requires ethical tools and transparency about your data collection process. If you’re ready to start optimising your time resource, a company called Memtime did a deep dive into the best time tracking tools for small businesses, check it out in this post (11 apps compared).
Going into even more detail on the revenue metric as it relates to labour costs, we have revenue per employee. As the name suggests, it demonstrates how much revenue is generated on average per person, i.e., by dividing the total revenue by the number of employees.
Revenue per employee is a top-level metric for understanding profitability and resource allocation. For example, if you see that your revenue per employee keeps dropping month to month, you know that you have either a resource planning problem or a sales & marketing problem. On a very basic level, it shows that you have too many people to stay profitable.
If you’re looking for more nuanced data, individual utilisation is a better metric. It’s clear that not all employees work the same amount and bring the exact same average revenue.
Still, revenue per employee is a good indicator of overall performance and any possible staffing issues. Small businesses benefit from keeping an eye on it to spot profitability issues early on.
Last but not least, we have revenue per customer. This data point follows the same logic as revenue per employee in that we divide the total revenue by the number of customers, treating them as having roughly the same value.
Depending on your business type and pricing model, you might derive additional metrics from your average revenue per customer/user. For example, if you offer products or services on an annual contract basis, you might calculate monthly recurring revenue (MRR) by multiplying the average revenue per customer by the number of paying customers you currently have.
Just like revenue per employee, revenue per customer is a top-level indicator of business health and profitability that should grow over time. If you notice that your average revenue per customer decreases month to month, you might want to sell more products or services or raise your price point to ensure profitability.
When it comes to tracking data as a small business, it boils down to keeping track of your revenue in relation to your biggest expenses – usually staffing and any other production costs.
This article is an overview of the top 5 data points and metrics to keep track of as an SMB. Feel free to use this list as a starting point for building your profitability-focused data reporting model. Whatever metrics you choose, they should serve you in making profitable decisions for scaling your small business.
