eCommerce is a tough industry. You're always looking for ways to improve your profitability, efficiency, and overall performance. One of the best ways to do this is by tracking and analyzing financial metrics and key performance indicators (KPIs). So what are those beasts and why are they so important for your success?
Financial metrics are used to measure and track a company's financial performance. They tell you all about your sales, profitability, cash situation, efficiency of operations, and how exposed you are to risk. Understanding financial metrics is a must for any business no matter your size, or whether you are bootstrapped or funded. Examples of the most common financial metrics include Gross Profit Margin, Net Profit Margin, Working Capital, Revenue Growth, Inventory Turnover, Net Cash Flow, and Quick Ratio.
KPI’s on the other hand measure your performance against a plan or a goal. KPIs can be financial or non-financial. They measure progress and help guide you towards a specific outcome you are seeking. If you want to reach $5m in revenue in 2023, then revenue here is an example of a financial KPI. Examples of common eCommerce KPIs include measuring your Average Order Value (AOV) in order to achieve your plan to increase it to $X by the end of the quarter, Customer Lifetime Value (CLTV) (if you want to reach an average of $X by the end of this year), or Customer Acquisition Cost (CAC), if you aim to end up bringing it down by $X by June 30.
Both metrics and KPIs are commonly displayed as a number or %, and both provide some kind of valuable insight into the business’s performance in a given area, or as a whole.
1. Benchmark against your competition. Financial Metrics allow you to evaluate the financial health of your business, as well as benchmark against your competitors. By using standardized metrics also utilized by everyone in the industry (hello banks and VCs!), businesses can see how they stack up against other companies, and their competition. This can provide valuable insights into areas where your business is performing well and areas where you need to improve. By focusing your attention on such improvements, you can achieve better business results, get closer to the industry standards, and eventually surpass your competition.
2. Get funded easier, quicker, cheaper. In addition to benchmarking against your competitors, you can also benchmark against yourself! Measure your own performance, growth, and trends over time, and evaluate your financial status, for internal or external purposes. For example, metrics and KPIs such as revenue growth, profit margin, and customer acquisition cost can provide valuable information about how well a business is performing. What’s great here is that there is no ambiguity in numbers, and metrics and KPIs allow you to compare apples to apples and present the most accurate picture of your business’s performance to banks and investors. By having such data and analysis readily available to present to your potential lenders, you increase your chances of success in obtaining funding much quicker. As an added bonus you won’t need to struggle through getting all of the data together at the last minute, or hiring expensive consultants to do it for you, when the lender does end up asking for it.
3. Have quality insights and make better decisions faster. Tracking financial metrics and KPIs is also essential for keeping a finger on the financial pulse of your business. This can help you identify issues within the business and provide valuable information to develop solutions. For example, if a business notices a decline in revenue growth, they can use KPIs such as customer lifetime value, churn rate, and average order value to identify potential areas of concern and come up with solutions to address them. By monitoring financial metrics and KPIs regularly, you can spot potential issues early on and take action to address them before they turn into a more significant problem. No more lack of information, not understanding where you are losing money or why your bottom line cannot keep up with your expectations. You finally will have all the data in front of you to make better decisions faster, which in turn will lead to increased profitability and less time wasted on the back and forth with your team and scrambling to understand what is going on.
4. Level up your team’s performance. By looking at key financial metrics and KPIs, businesses can gain a better understanding of their overall performance and identify areas where they need to make changes or improvements. With the right data at hand, you can set up KPIs for a specific department or area of your business, or for your company as a whole. By measuring and analyzing them on a regular basis, you can ensure that you are making progress towards the objectives you set, and make adjustments as needed to remain on the right course. Monitoring KPIs adds accountability and ensures that you and your team stay on track to achieve your common goals.
As you can see, tracking and analyzing financial metrics and KPIs is essential for ecommerce businesses. By using standardized metrics, businesses can benchmark themselves against competitors and gain valuable insights into their overall performance, identify and resolve issues, and focus on what matters. Having metrics analysis available helps obtain financing more painlessly, while tracking KPIs helps businesses set and meet goals. Monitoring financial metrics and KPIs is essential for knowing the full financial picture of your company and making better and faster decisions that ultimately will lead to the prosperity and success of your ecommerce business.
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