Do you have a business but don’t know if its profitable or not? Don’t worry, here are the 8 ways to measure your business growth right now. In this article, we have explained the key business growth metrics that big companies use to evaluate their business progress. Of course, this information is very useful if you have plans to dominate the market.
Entrepreneurs and new business owners are constantly in a quandary about whether their business is growing or not. This is because measuring business growth is necessary to determine the success of any company. It doesn’t take a professional to start a business. Anybody can start a business and would be burdened with the tasks of securing funds for the business, managing its finances, administration, etc.
Business growth is the improvement of some part of the success of an enterprise which usually involves raising revenue and cutting overhead cost of running the business.
In most cases, when a business begins to sell more of its products or render more of its services and generates more income, the business is said to be growing.
However, a very important aspect that must be looked into is the cutting of costs of running the business. A growing business must be able to cut overhead cost as it grows due to better technology, processes, internal and external economies of scale.
It is possible that a business is growing but is not getting better, if there is a growth in revenue that is not followed by an increase in percentage profit and reduced overhead cost. This could mean that so much money is pumped into the business but it is not efficiently managed.
Also a company might be facing OVER-TRADING. This is a situation when a company engages in more business than can be supported by the market or by the funds or resources available. In this case, the company might experience working capital challenges in the future.
Also, your company might only be growing because of a certain economic trend or an event that has pushed your business forward. However, what happens when that time passes is what you should be really interested about.
Here are the methods we recommended to measure your business growth.
Competitors facing similar conditions like your company is can give you a clearer understanding of whether your company is doing well or not. Growth is important within your company, but measuring growth in comparison to competitors determines your success and growth in the industry.
Companies listed in the stock markets are required by law to publish their records to the public. So a comparison can easily be done from the financial statements. In cases of smaller companies, objectivity and subjectivity comes into play.
You can make your research discretely or directly ask if you trust that at least near-accurate records would be provided. Also, make sure you take the size and age of the competitors into consideration.
This follows up the previous method. Using the industry average to assess your business performance or growth is a very good method.
You can hire a professional to help measure your business growth with his (their) own methods, skill and resources. This is usually a reliable way to assess your business because of the external eye that has been used.
Your customer base is a very useful way of assessing your company’s growth. This generally depends on your kind of business. If your business is a type that deals with many customers, then your primary goal most times would be to get new customers frequently.
By assessing the increase in your customer base from time to time, you can measure your business growth. If you have a few bulk buyers as your customers, then you can also assess the ease at which you can get new customers. What happens if one customer withdraws… are there others who will jump in to replace them without thinking?
Better quality customers with customer/Brand loyalty is a very essential point. Your customer base should be bringing in more profit. Your customers should be able to finance your business.
Customer value is often measured as customer lifetime value (CLV), which involves multiplying the average sale value by the number of repeat transactions and then multiplying that total by the average retention time of each customer. CLV should be recorded and you should seek to increase it from time to time.
Another way of evaluating business growth is keeping track of your workforce growth. A growing company should continue to hire new employees as it expands.
By dividing the number of employees at the end of the year by the number of employees at the beginning of the year or dividing the employees by the end of year 2 by the employees at the beginning of the year 1.
However, you should be conscious of your employees turnover too.
Your company’s market share shows the portion of the value of the given industry that your company controls. It is calculated by (IR/ CR)… Which is the industry’s total revenue at a given period in time by the Company’s revenue. It shows how much of the Industry’s total revenue is contributed by the company.
By doing this from time to time, a comparison can be made to see if there is a percentage increase in the company’s market share.
The gross margin is the difference between a company’s revenue and its cost of goods sold. This is also known as gross profit. This represents how effectively and efficiently the company is able to convert raw materials into finished goods.
A growing company as we noted earlier should be able to secure better technology, processes and economies of scale. These combined should reduce the time and money the company spends on purchasing raw materials, and a reduced cost per unit in converting these raw materials to finished goods. Hence, a growing company should be able to experience gross profit margin growth overtime.
The objective of any business is to make profit which makes profit the most reasonable criteria to use in evaluating a company’s growth. Profit should never be mistaken with revenue. Revenue is the totality of income that accrues a company.
Profit which can be divided into gross and net, is arrived at after costs have been deducted. The net profit measures the company’s earnings after all expenses and taxes have been subtracted from revenue. A continuous increase in profits overtime from the ordinary activities of the business shows good sign of business growth. This is because increasing profits mean many things.
Firstly, it means that the company has been able to reduce its overhead costs. Overhead costs are costs that are not directly proportional to the level of activities of the business. They are indirect costs… Meaning that direct labour, materials and expenses are not included.
Overhead expenses include accounting fees, advertising, legal fees, insurance, rent, etc. For example, if a company advertises on television for N50,000 and produces 1million products in a year. When it increases production to 1.5million products, it will still spend the same N50,000 on advertising, all things being equal.
Therefore, it makes more profits for the additional products it is producing because it logically is not paying for their advertisement.
This makes profit a very useful way of measuring business growth.