Important Business Metrics as a Benchmark for Entrepreneurial Success

Starting a business in the digital era is very closely related to benchmarks and business development indicators. Regardless of the difference in the business model being undertaken, the success and effectiveness of the business can be made based on the same measurement.

Not limited to businesses that focus on digitization, basically this metric applies to business in general. Some metrics may be more popularly recognized based on digital marketing practices. However, it is generally applicable to measuring overall business effectiveness and efficiency.

What are Business Metrics?

Business metrics measure the health and efficiency of a business. Business metrics are critical to building a successful company. Several metrics can be used to assess certain parts of a business model. The following are metrics that can be used to calculate business development.

1. Return on Investment (ROI)

Return of Investment (ROI) is used to measure investment efficiency. This metric can be used to compare various investments made into a business.

Measuring ROI is a great way to show the success of a business. Because it can be used to measure several daily operational needs, ROI is also one of the most popular metrics to use.

You can use it to calculate the profitability of certain tasks and revenue models. As one of the simplest metrics, ROI is also easier to calculate and understand. ROI also has easy properties compared to other types of investment.

For example, you can compare the efficiency of your marketing tools and business campaigns. By measuring ROI, you can learn what to invest more of.

2. Gross profit (Gross profit)

Gross profit is one of the most important metrics a businessman should know. These metrics are also important measurements that you can use to run your day-to-day business.

Gross margin is one of the other three profit margins namely operating profit and net profit. Operating profit takes into account all expenses necessary to run the business. Net income is the bottom line that is used to consider things like debt payments and secondary income.

Gross margin is revenue less production costs divided by revenue. Gross margin is the easiest to calculate so it has more use cases in everyday life. You can use it to calculate and compare product profitability.

If you want to calculate the effectiveness of a business against market competition, use gross margin as the metric. This measurement can tell whether or not the pricing strategy is correct according to current operational conditions. You can also find out whether the overall margin can support the other expenses of the business.

3. Burn rate

For companies operating with venture capital funding, measuring the burn rate is very important. This metric is useful to use as an indicator to start investing more in sales.

The burn rate measures negative cash flow and can tell when you're about to run out of money. In this way, you will also know when to look for additional sources of funding for your business. The burn rate acts as a guide to help maintain business operations and is calculated from the amount of cash used in a month.

4.Current ratio

The current ratio is used to test the company's liquidity and working capital. The current ratio is the company's current assets divided by its liabilities. By calculating the current ratio, you will see the company's readiness to pay short-term obligations such as taxes, debt and expenses in order to achieve the highest possible current ratio.

A business must maintain a current ratio above 1. A current ratio below 1 means that more working capital is needed to improve the health of the company. When the ratio is too high, there is too much cash available and must be invested for long-term growth.

The most important thing that can be known from the current ratio is to pay everything that needs to be paid with the available working capital. Current Ratio is measured by dividing current assets with liabilities.

5. Cost of Acquisition (CAC) and Lifetime Value (LTV)

Knowing a customer's LTV and CAC is one of the most important pieces of information a business can get. You can calculate acquisition cost by adding up your marketing and selling costs and dividing by the number of customers reached.

To calculate lifetime value (LTV), track all profits generated by a customer in a selected time frame and subtract acquisition costs. By adding variables, you can create a more detailed version of LTV.

The more you know about customer behavior, the more accurate the calculations will be. Another way to calculate LTV is to average orders times repeated transactions to average customer length in months or years.

Knowing LTV and CAC gives you the advantage of reacting quickly. A low LTV may indicate low repeat orders. Remember that LTV and CAC are measured in money. Therefore, the value depends on the nature of your business.

Overall, business metrics cannot stand alone to measure the success of a project. However, all metrics can be used to complement each other and represent the financial and operational health of your business.