3 Metrics to Track from Day 1
As a business owner, it's essential to track and understand your financial performance from day 1, but it can be a bit daunting to figure out where to start, what’s important and the how. That's where Key Performance Indicators (KPIs) come in - these are the metrics you'll want to keep an eye on to make sure your business is on track from the beginning.
Gross Profit Margin
This one helps you understand how much money you're making after accounting for the cost of goods sold. In simpler terms, it tells you how much profit you're making for each dollar of sales. This is important to track because if your Gross Profit Margin is going down, it could mean you're spending too much on production or not charging enough for your product or service. To calculate your Gross Profit Margin, divide your gross profit (revenue minus the cost of goods sold) by your total revenue and multiply by 100%. This will give you the percentage of your revenue that is gross profit. This metric should be evaluated monthly and any fluctuations should be investigated. The higher this percentage is, the better.
Net Profit Margin
Another important KPI closely related to Gross Profit Margin is Net Profit Margin. This one is a bit broader and tells you how much money you're making after accounting for all your expenses, like taxes, salaries, and other costs. It's important to track because it gives you a better sense of your overall profitability - if your Net Profit Margin is going down, it could mean you need to cut back on expenses or find ways to increase revenue. To calculate your Net Profit Margin, divide your net profit (total revenue minus all expenses, including payroll, taxes interest, etc.) by your total revenue and multiply by 100%. This will give you the percentage of your revenue that is profit.
Break-even Point
The final KPI we'll discuss is the Break-Even Point. This one is pretty straightforward - it tells you how many courses you need to sell to break even, meaning you're not making a profit or a loss. Knowing this number is essential for pricing your product or service because it gives you an idea of the minimum price you need to charge to make a profit. If your Break-Even Point is too high, it might mean you need to find ways to lower your expenses or find ways to increase revenue. To calculate your Break-Even Point, you'll need to know your fixed costs (like rent, salaries, and insurance) and your variable costs (like materials and labor). Divide your fixed costs by the difference between your selling price per unit and your variable cost per unit. This will give you the number of units you need to sell to break even. You can also calculate your Break-Even Point in dollars by multiplying the Break-Even Point in units by your selling price per unit. If your eyes just went cross-eye, don’t worry I will give an example:
So let's say you're a course creator or business coach and you've developed a new online course. Your fixed costs for creating the course were $5,000, which includes things like software subscriptions, equipment, and marketing expenses. Your variable cost per student is $50, which includes the cost of any materials you need to provide them with. You plan to sell your course for $500 per student.
To calculate your Break-Even Point in units, you would divide your fixed costs ($5,000) by the difference between your selling price per unit ($500) and your variable cost per unit ($50), like this:
So you would need to sell 13 units of your course to break even. Since you can't sell a fractional unit, you would need to round up to 13.
To calculate your Break-Even Point in dollars, you would multiply the Break-Even Point in units (13) by your selling price per unit ($500), like this:
So your Break-Even Point in dollars is $6,500. This means that if you sell less than $6,500 worth of your course in a given period, you will be operating at a loss. If you sell more than $6,500 worth of your course, you will be making a profit. Knowing your Break-Even Point can help you set sales goals and make pricing decisions that ensure profitability for your business from the onset.
Bottom-Line
Overall, tracking these KPIs can seem a bit overwhelming at first, but they're essential for understanding your business's financial health. By keeping an eye on your Gross Profit Margin, Net Profit Margin, and Break-Even Point, you'll have a better idea of where your business stands and what you need to do to improve it.
If you need help coming up with metrics tailored to your specific business let's chat!