6 essential numbers to track small business growth
A lot of small businesses are started based on dreams—from the vision of the brand you want to build to the dream of the life you want to live. But to bring your dream to life, you need to rely on hard data and real numbers. Often referred to as key performance indicators (KPIs), these numbers offer an objective way to track business growth and gain insights into ways to make your company more successful.
Below you will find specific KPIs related to your business's financial health. These numbers offer the ability to take a snapshot of your company's overall revenue versus expenses. From there, you can track progress over time, see what's working, and find out where you can make adjustments to grow your business faster.
1. Gross margin
Gross margin is the amount of money that your business receives (aka revenue) on the sale of a product or service less the cost of goods sold. The formula to calculate your gross margin is:
Gross Margin = (revenue – cost of goods sold) / revenue x 100
Here is an example: The Happy Café sells pies for $25 each. The cost to make and sell each pie is $12, including labor, supplies, and ingredients, which makes the net revenue $13 per pie. Its gross margin is then 52 percent ($13 / $25 x 100).
Gross margin is an important number to know and track, especially since the cost of goods sold is likely to increase over time. Thus, while today you may have ample revenue to put back into operations and marketing, a sharp rise in the cost of goods sold could strangle your company's cash flow tomorrow.
However, you're not at the mercy of rising costs; you can do one of two things in response—increase your prices or decrease the cost of goods sold. Some common ways to reduce the costs that go into your products or services include:
- Negotiate supplier discounts by buying in bulk, signing up for automated reordering, or getting a discount for paying quickly (or in cash).
- Source new suppliers that offer better pricing.
- Increase efficiencies in processes, equipment, automation, and so on that reduce labor costs through time savings (or require less input of supplies or ingredients).
2. Average ticket
Average ticket refers to the mean (or average) amount of money per sale. It gives you a baseline to determine if your business is generating adequate sales to meet expenses. This baseline can then also be used to project future revenue and set goals to increase your average ticket and grow your company faster.
There are a few ways to calculate this number. If you have a point of sale (POS) system, identifying your average ticket could be as easy as pulling up a report. Likewise, your billing or invoicing software may offer the ability to see this number instantly. To calculate your average ticket manually, take the gross amount of your sales in a given period (e.g., a month) and divide it by the number of transactions. This amount is your average ticket.
Average ticket = gross revenue / number of transactions
Here's an example of how to calculate an average ticket with the fictitious business used above, The Happy Café. The Happy Café processes around 1,800 transactions each month for a total of $65,000, making its average ticket $36.11.
For most small businesses, increasing the amount of their average ticket is the key to sustainability and growth. An obvious way is to raise prices, but it's not the only way, and raising prices can also mean fewer customers or hurt your ability to compete. To raise your average ticket without increasing prices for customers:
- Develop scripts your team can use to generate upsells (e.g., getting the customer to buy an upgraded plan or product).
- Cross-sell related goods or services that amplify customer outcomes.
- Place impulse-buy items at the point of sale.
- Share “you might also like" suggestions during the checkout process of online transactions.
- Notify customers of items that are selling out quickly to trigger fear of missing out (FOMO) purchases.
- Rework the layout of your store (online or in person) to highlight the products or services you want the customer to buy (for example, service-based businesses often do this by putting a “most popular!" label on a mid-level plan to encourage buyers to upgrade from the base offering).
3. Customer lifetime value
Customer lifetime value, or CLV, refers to the average total amount of revenue your business will generate per customer. It takes your average sale (or invoice, or retainer amount) and multiplies that by average customer frequency (e.g., how often the customer makes a purchase from your company) as well as the average length of time someone remains a customer of your business. The formula looks like this:
CLV = average purchase amount x average frequency x average relationship duration
The average ticket number of The Happy Café can be used to come up with an example. Its average ticket is $36.11, and its customers return about every two months (six times a year). While it does have patrons who have been visiting for over a decade, on average, customers keep coming back at this rate for about four years. Therefore, its CLV is $866.64.
The customer lifetime value is an important number to track for business growth. For one thing, it allows you to determine how many new customers you will need to attract to account for customers who are likely to stop returning. It also gives you another baseline to determine if your business has adequate revenue and identify ways to increase CLV by getting customers to return more often, spend more per visit, and remain a customer for a longer period of time.
In the average ticket section above, you will find common ways to increase your average ticket. But here are some things you can do to get customers to return more often and keep them on the books as paying customers longer:
- Launch programs with loyalty, referral, and purchase rewards.
- Leverage limited-time offers (LTOs).
- Stay top of mind with email and text marketing offers and updates.
- Continuously improve customer service by identifying blockers in the customer journey and investing in training for staff.
- Develop “surprise and delight" moments that get customers talking about your business (and excited about returning).
4. Revenue growth rate
In terms of numbers to track business growth, one of the most essential basic KPIs to know is your company's revenue growth rate. Put simply, this is the percentage of growth your business sees over time by comparing one period (such as a year or a quarter) against the previous period. The formula for revenue growth rate looks like this:
Revenue growth rate = (current period revenue – previous period revenue)/previous period revenue
Here's an example of the revenue growth rate for The Happy Café. In the last quarter of 2022, The Happy Café earned revenue of $125,000. In the first quarter of 2023, it earned $143,000. So its revenue growth rate quarter over quarter was 14.4 percent.
Obviously, a company could also have a negative growth rate if the current period's sales are less than the prior period. And this is normal, especially for businesses that have seasonal or cyclical highs and lows. It can also be driven up or down by outside factors, such as the economy or changes in the marketplace.
One negative period of revenue growth may not be cause for alarm, but a succession or downward trend over time means that it's time to look at your business to see where adjustments need to be made. This could include things like increasing your marketing reach to gain new customers, reducing input costs, improving customer retention, increasing the frequency of customer visits, or even changing your product or service offerings to better serve your target audience.
5. Cash flow
Cash flow refers to the amount of money your business has immediate access to in order to meet operating expenses and invest in growth initiatives. It's a critical number to track for business growth. Low cash flow can make it challenging to keep up with expenses and limit your ability to grow and expand or take advantage of opportunities in the market.
Also, depending on your business type and market, cash flow may be low due to cyclical or seasonal sales. In this case, it's important to anticipate when low cash flow cycles will occur and plan accordingly by setting aside money when sales are flush or setting up a business line of credit.
If you do find that your cash flow is low on a regular basis, you have several options. One of the most obvious solutions is to increase pricing, however, this is not always an option in a competitive marketplace.
While it may seem counterintuitive, investing more money in marketing is one of the best ways to combat low cash flow. Effective marketing can bring your business more customers and increase average ticket and customer lifetime value using the strategies above.
Other ways businesses approach seasons of low cash flow is by cutting costs, like companies that hire seasonally. Low cash flow can also be offset with business loans or a business line of credit. (Keep in mind, though, that you will need a plan to improve cash flow in the future to repay any debt financing used for your company.)
6. Return on investment (ROI)
ROI, or return on investment, is the monetary return enjoyed compared to the amount of money invested. The formula looks like this:
Return on investment = net revenue / cost of investment x 100 percent
Here's another example of the formula for calculating ROI with The Happy Café. In 2022, the owner of The Happy Café decided to expand its products by selling take-home pies and made a $10,000 investment for the supplies and equipment needed. It earned a net revenue after all expenses were deducted on take-home pie sales of $30,000. The owner's investment of $10,000 thus earned an ROI of 300 percent.
As with gross margin, it is an important number for tracking business growth over time, since costs often rise before corresponding price increases occur. Because of this, your ROI can diminish over time. This could leave your business short when it comes time to grow or expand, or fail to produce the monetary return you are looking for as the business owner.
Realizing a high return on investment is not always a sure thing. While you might have what seems like a great idea, don't skimp on due diligence here. Before making a significant investment in a new initiative, research the marketplace, potential demand, competitors, and more.
When it comes to knowing your business' numbers, less is never more. Take time to understand what these numbers tell you about the health of your business today, set specific goals for each metric, and implement proven strategies to meet them.