It's common for founders of new product companies to focus solely on sales. After all, sales are the lifeblood of every business. Without them nothing else matters. But once you have sales, what are the best ways of understanding how those sales impact your business? Here are 5 great metrics to track the health and performance of your product business:
Gross margin is simply revenue less cost of sales expressed as a percentage. This may be the most important metric in your business. Gross margin is a measure of the quality of your revenue. Low gross margin indicates that after cost of sales there is little money leftover to cover operating expenses and to contribute to profit. The way gross margin is tracked will depend on your business, but most commonly it is tracked overall, by business line, or by product.
Determining the sweet spot for inventory levels is the ultimate goal of product companies. The more inventory a business carries the more capital that is tied up and unable to be deployed in other parts of the business. On the contrary, low inventory can affect customer service and revenue due to stock outs. Additionally, any business that carries inventory needs to make inventory taking a priority. Without the proper oversight, inventory shrink can become a runaway problem and leach time and money from other areas of the business.
Piggy backing off inventory, fill rate is the percent of a time all items on an order can be completely fulfilled. This should be tracked at both the individual order level and overall. The lower this percentage the more often orders are shipped incomplete. This impacts many parts of the business including revenue, reorder rates, customer happiness among other things.
This is the amount of time from order to fulfillment. This can be tracked across all types of orders in your business including purchase orders, customer orders, production orders, etc. Measured across time, this metric will give you insight into how efficient your business is and whether or not prices improvement is ingrained in your business.
This is measured by dividing cost of sales by average inventory, calculated using period beginning and ending inventory. Inventory Turnover tells you how often the business is replenishing inventory. For the most part higher the ratio the more efficiently capital is being used for inventory.
These metrics are the tip of the iceberg and depending upon your product there may be specific metrics that should be tracked. Understanding what is important for your business and finding the metrics that provide the necessary insight will put you ahead of the competition in building a thriving business.