The Better Business Analysis Institute presence.
The Better Business Analysis Podcast with Kenjamin Walsh.
Hi everybody, and welcome back to the Better Business Analysis
Podcast with Benjamin Walsh. And today we are going to be
focusing on some business statistics that every business
analyst should know. OK.
The key business statistics that you should really be aware of
when talking to the leadership team or monitoring as a business
as a whole. So we're going to go through the
list. It's not, you know there are
quite a lot of statistics that you can know and I'm just going
to talk about 10, OK. What I think are the top ten
business statistics that will give you an idea around the
performance of the organization and provide insights into the
your organization's overall health and allow you to kind of
track progress or identify areas for improvement.
It also helps make informed decisions.
So a lot of these key indicators may be tied up in your objective
statements or your strategic plan.
So it may, the first one for example is number one is
revenue, how much money is your company generating and of course
that their revenue is usually could be a factor in terms of
increasing revenue by 10% year on year.
Sometimes that's actually a pretty, pretty important step.
We'll talk talk about how revenue plays into something
called EBITDA later, but revenue is a key underlying step that
you should really know. So I will say that depends when
I when I say you should know this, it depends on kind of what
kind of BA work you're doing. But if you're a business owner
or you are dealing with the executive team, revenue should
be open and honest there. Sometimes it's locked down to a
management team, especially if the figure is sensitive AKA
things aren't going very well. So you may have some trouble
finding out what these numbers are in your company.
I just want to say that straight away, but you're business should
be tracking these. And if you're a startup company,
you want to be tracking these from day one.
OK. So we got to get straight into
the T, the 10 key business statistics every business
analyst should know, starting with #1, which is revenue.
Revenue is the total amount of money that a company generates
from its core business activities, OK.
And it's usually the sale of goods or services.
It's generally the main revenue stream that companies generate
from, unless you're a financial firm and there might be things,
other revenue sources that they can have or you're leasing out
buildings, which could be a revenue stream.
The primary revenue that you really need to worry about as
ABA is the sales of goods and services, OK.
And that's by its core business activities.
And of course core business activities are just processes.
Revenue is a critical metric. It will talk about it's the
company's top line in terms of growth and profitability.
And really having strong revenue is the most important factor in
terms of growth of your company. So if you don't have strong
revenue, then you need to start reducing your costs and you know
things that things don't look good.
So number one is revenue. If you don't increase your
revenue, then you're going to look at restructuring and
lowering costs and things are not going your way.
It's usually a key indicator that you either the market
itself is experiencing a percentage revenue kind of drop.
So you know consumers aren't spending as much money, but if
that revenue drop is not consistent among your
competitors, so your competitors aren't experiencing I'd say a
10% drop and you are and they're only experiencing 1% drop and
there's something wrong with your core business or your core
offer. So red flags, your sales team
may just not be performing, they just may not be as good as the
competition being straight up there at getting deals.
New business is so important here.
Revenue is so important and a lot of people it gets, there are
so many statistics and we do about 10 today.
So, so you know that even even summarizing in terms of 10
people can get so caught up in other factors that they miss
their revenue isn't strong almost and your costs are
reasonable. So that's the flip side then you
know there's there's nothing else your business is in is in
the poke. So revenue is definitely #1, #2
is gross profit margin or sometimes just referred to as
gross margin, The profit margin sometimes and we talk about
gross and we talk about net and we'll start with gross.
So gross profit margin is the measure of the company's
profitability before deducting operating expenses.
OK. So I'll what does that mean,
Ben? It is calculated by dividing the
gross profit, OK, by revenue. We're going to talk about what
gross profit is. So revenue minus the costs of
the goods sold. So gross profit is effectively
what you earn before your your your costs.
Sorry. So your gross profit is your
revenue. So how much money you came in
and minus your cost is your gross profit.
So it's the difference between your revenue and your costs to
generate their revenue. OK.
The gross profit is your revenue minus your costs.
Now if we take that gross profit figure, so let's just, I'll just
give you an example. So it's very, very clear.
So let's say you earned $1 million in revenue, so $1
million was paid in invoices to your company for your goods.
So you earned $1 million and and it cost you in order to generate
the revenue, all the cost of the business although standard cost
of a business cost of goods like paying staff let's say and and
and all the materials it costs to deliver those services cost
you $800,000. Then your gross profit is
$200,000 revenue minus your cost of goods sold, OK, so that's
$200,000. So that's your gross profit.
And then if you divide the $200,000 by the $1,000,000,
which is your revenue, you end up with a gross margin.
So in that case, it's 20%. Your gross profit margin equals
20%. A higher gross profit margin
indicates the company is effectively converting sales
into profits. So we talked about the flip side
between the fact that our revenue is critical in terms of
the growth of a company. It can stand still and your
revenue could be could be stagnant, but your if your cost
of goods remain the same or go down, your costs go down then
you can still be earning a profit.
However, if your costs are going up and your revenue staying
staying still, then what you see is that your gross profit margin
is going down, OK. So it's just one easy figure
instead of a number like 200,000 which is your gross profit,
gross profit margin is, is a percentage is very helpful
because you you can measure that figure and it's probably the
number one figure talked about. So revenue and gross profit
margin are the two figures that management talk about.
So I go we earned $1,000,000 in terms of revenue and our margin
was 20% and and that figure that 20% figure is actually kind of
you can benchmark that against other industries and and some
industries that figure is higher.
And so you know people are making a 30% margin that's how
it's discussed. And then maybe in a for example
supermarket the margins are actually lower.
So it's about the amount of sales and we'll we'll get that
get to that. But in a minute their margin's
actually little, it could be like 5% or 2% and that's OK
because of their business model. But say you're selling a luxury
item like a sports car or a shop, your margin needs to be
high, higher than that. And so depending on the industry
that's that, that'll indicate a figure and the most important is
the trend of that, right. So when you start up or go
through some drama, the if that percentage is going down, then
it indicates that something's going.
Either your costs are going through the roof or your revenue
is starting to, you know, fluctuate and and maybe not go
in the right direction. So gross is stilled.
So gross profit, profit margin is really important.
Also when you think about the like if you're investing in a
company or you put your money in the bank, you get interest.
This figure is very similar to that figure when discussing
whether or not it's worth investing in the company, OK,
depending on how much margin it makes.
So we're going to quickly. So that's your gross profit
margin and then we're going to move to #3, which is your net
profit margin. So net profit margin is the
measure of the company's profitability after deducting
all operating expenses including taxes, OK.
So when we talked about the gross profit margin, there were
things we could control that was the how much cost we spent to
generate the revenue, whereas the net is generally there are
other kind of expenses that a company has to run like maybe
depreciation on assets and all all these accounting figures.
But the biggest one is probably tax, right?
So if you paid your tax, how much you got left?
So net profit margin is calculated by dividing the net
income. So that's revenue minus all
expenses by revenue, OK. So as opposed to a gross profit
margin which is revenue minus the cost of goods sold.
So them the bits you can control, you know people costs
and costs that go into delivering the actual end
product or service. Net profit management is revenue
mining all the expenses. So every single expense you have
the car expense, the the tax expense, you know it's all the
costs of doing business, not just generating the service that
you provide the revenue minus all of your costs, just like you
might do at home with your budget.
So you know your income for the year minus all the things you
have to pay everything and you divide that by revenue.
So again the net profit margin is really clear and we talk
about this a lot too. So it indicates more than just
the, when we talk about the gross profit margin, that's kind
of just looking at delivering services net profit margin.
Higher net profit margin indicates that the company or
organization is effectively in man managing its expenses, all
expenses and generating profit. So you can look at the
difference between your gross profit margin and your net
profit margin. And one really good example here
is that if you were a company that generated money through
people, like a recruitment company for example, or a
consultancy company where you're charging your client a right to
do business. If there was a massive
difference between gross profit margin and net profit margin, it
would mean that your back office staff, not the cost of goods
sold, which are the people going out and doing the work, but that
the the people cost and the location cost of your
organization. The ones that don't generate
profit just are what we call a sunk cost or just a cost that
you need to do back in business. Your back in function may be too
big, always inefficient. So that's why gross profit and
net profit are interesting and then of course revenue.
So that's how we and and and these are really important
because you can't, you really want to be able to monitor these
figures on a dashboard and those three figures are so important.
So revenue, gross profit margin and net profit margin and then
of course you can look at all the costs and once you that
costs the divide into different categories like your expenses,
it becomes a little bit harder then you have to do some more
analysis. So it's a bit like your own
home. You could say when you pay all
your bills with your income, when you pay all your bills,
what's left? You know when you, when you pay
the mortgage, that's probably your biggest expense and food
cost. And then you could say that all
the other expenses are a little bit more optional, like if you
go on a holiday or you buy nice cheese this week or you, I don't
know, buy pay off a nice car, that's probably more like your
net profit margin. So.
So you have a bit of a choice between your gross profit, what
you have to have and then your net profit margin.
OK. So the top three revenue, gross
profit margin and net profit margin and people sometimes just
say words like what's your margin, petrol companies do
that. I worked at a large petrol
company here in New Zealand. I mean it's now an energy
company doesn't just do petrol, but it was revenue and they have
to have margin. They talked about volume, so the
amount of sales they got and those figures.
In a petrol business, generally your margin is low, sometimes
regulated, so you can't earn a certain amount.
But of course, if your petrol prices go up, so does the amount
of money you make. Yes.
OK, cool. So if we now move over to the
number 4 stat and this is, look, I have chosen stats that are
more customer specific because we're living in a customer
focused world. So these are not necessarily the
figures or the stats that when you started doing business in
the 80s you might have come up with, but these are actually
really critical in 2023. So the next one I think is
customer acquisition costs, sometimes an acronym of CAC.
So customer acquisition cost is the average amount of money a
company spends to acquire a new customer.
So to acquire a new customer to buy a new customer.
And it might sound a bit weird that we buy customers, but we
do, we buy a customer through the spend on sales and
marketing. So all the expenses for sales,
all the marketing plans, campaigns, how much do you spend
on that for that is what you do, that's the activities that you
do in order to sell your product, you know knocking on
doors, doing campaigns. That is all your acquisition
costs and we need to take that total cost.
So let's say that's 100,000 a year, that's very, very light of
course and say for $100,000 a year we acquired we we spent on
sales and marketing and we acquired 1000 customers, OK.
So you would take the 1000 customers and you would divide
that by your cost and then that would give you how much it cost
to acquire a new customer. So in this case it would be
$100. So we've worked out that as 100.
We we pay $100 in order to we spend $100 in sales and
marketing in order to acquire one new customer and that's so
important because that figure depending on what you're selling
if it cost us $100 to buy a new customer and we're just selling
them a one off product which is costs $100 then you're not you
might be making money but your costs you're just covering your
costs right and and and and we're only throughout sales and
marketing there's all the other expenses in your company.
So it's a really important figure to work out but also
people under the in saying that it's not always bad.
Sometimes people don't do enough in sales and marketing they're
making when they sell their product and they've got a a
highly sought after product or a great product that people want
and they've got a good price point and they're making good
margin on it. Like we talked about before,
they might not be spending enough on sales and marketing.
So you really need to know how much does it cost for us to
acquire a new customer, which is your CAC, your customer
acquisition cost, how much does it cost, how much do we spend
sales and marketing to acquire one new customer?
Really critical. And that figure plus the figure
you make on your individual product sale is really
important. And that leads us on to the next
figure because it's you'll see this with subscription type
businesses, right. You sometimes look at
subscription type businesses, and I'm going to use an example.
I'm going to use an example of a pet online pet store that sells,
say, cat food. You know, those large bags of
cat food that you might purchase every three months.
So let's say you purchase it every three months, It's 4 * a
year, right? And and maybe you keep buying it
from the same company for at least a year, OK.
And each bag of cat food you spend, you buy them for say, I
don't know, they cost $100. OK.
So you're spending $100 and in the third month six, another six
months later you've spent $200.00.
And then 3/4 of the way through the year you've spent another
$100 bringing up to $300.00. By the end of the year you would
have spent $400.00 in cat food with this one company.
OK, and that figure, the if sale.
And you may have, you may have stayed with that company for a
long time, but let's just say you on average you stay with
this company for a year. We have a figure #5, it's called
customer lifetime value CLV. Customer lifetime value is the
total amount of revenue a company expects to generate from
a customer over their lifetime. So that we've worked out that
the average customer in this case will do 4 purchases of cat
food. So we just look at our, you just
look at our our revenue and right we can, we can, we can, we
can easily work that out. It is calculated by multiplying
the average purchase value, so looking at all your line items
in terms of purchases and working out the average and then
we divide it by the average customer lifespan.
So you should know how long your customer is with you, has been
doing business with you and a higher CLV indicates that
customer is building strong relationships with its
customers, right. So when you are selling a
commodity good, commodity good is something that you can get
pretty much anywhere and there isn't much of a difference
between products and you don't have much loyalty to the company
you're buying it from. Then sometimes customers CLV,
their lifetime value is quite low and so they'll do lots of
marketing and try and keep you on board with that company.
And the reason I give the pit example where I've just said
I've worked out the average customer spends let's say
$400.00. You know that's through 4
transactions over the year they've worked out the customer
stays with them on average for a year and by 4 transactions with
$400.00. The reason why that's important
with the Catfit example is that now you find that they offer you
a cheaper price if you sign up for reoccurring.
Office, right. Instead of doing a one off
purchase for four for you know every three months, they
actually offered you a discount. So they've worked out that they
can, they can, you can, they can offer you a discount of say 20%
if you stay with them or sign up for for longer than a year for
example. You know cancel any time but
it's cheaper and if you don't remember then you're going to be
spending it. So that provides them with that
company with two great advantages.
One you might forget, so you're honest, you know all the
advantages of subscription based is that you know people forget
that they've got a subscription so they'll send you the good and
so they've got guaranteed income and you've also yeah you've
signed up so your customer lifetime value is higher.
And also then the reason why this is really important is we,
when you think about the mark sales and marketing that they
can spend to acquire you, your customer acquisition cost, if it
cost them to say $100 to get you basically to market it to you as
an individual as that's their customer acquisition cost, then
I want you to stay for at least a couple of the sales, right.
So I can afford to drop the price because I know I'm going
to keep you for a longer period of time and it and then I can
and if I've worked out that that's a good amount of money,
then I can spend more marketing, getting more customers.
And so these figures are really important, especially in the
marketing space. So customer lifetime value is
how much are the total revenue a customer expects to generate
from you, basically you as a customer over your lifetime.
And that's that's important too, because like I said, if that is
low, then it will indicate that there are people that don't have
loyalty with you and they don't have a strong connection with
you as your company or your brand or your differentiator.
OK, number six. So number six is the customer
churn rate. So the churn rate is the
percentage of customers who stop doing business with the company
in a given period. OK.
Again, so this this is really important.
So their lifetime value is around the total amount of money
we make for a customer, right. But also you can work out the
number of customers you lost by the right, by the total number
of customers that you had at the beginning of a period.
So if you had 100 customers within a three month period, but
you lost, I don't know 50 of them, then your churn rate is
high and that's about retaining your customers.
So when we talked about South, customer lifetime value and
customer churn rate are LinkedIn some ways, but you wanna keep
customers and so it's around not just acquiring new customers but
keeping your existing customers happy.
Now with an subscription type business and cat food, it's a
bit more of a commodity transaction.
But if you're talking about maybe doing business, say you're
AI, don't know a company that's supplying an international
airline, If you lost a customer, a couple of customers over the
year, that could be critical to your revenue and and that would
shock you. So your customer churn rate
should always, always be measured as well.
That's number six. And then we'll move on to
quickly to #7, which is the conversion rate.
OK. So this conversion rate is
around people knowing about you, so landing on your website, your
landing page. So they, you want to know that
if your marketing is being effective or not by saying,
well, when we market to these people, so we're spending money,
that's a cost that's going out no matter what to send an e-mail
or to update our website or to generate some ads.
And then you need to know how many people are actually going
to make a sale. So a conversion rate indicates
that you're converting. If it's higher, then it
indicates that your website traffic is turning into sales or
leads, OK. And it might could be either of
those depending on what type of conversion you're looking at.
So in the sales process you definitely want to lead, you
want people to know about you, so you're measuring awareness,
but then you want to convert those into sales, but they might
be your sales team effectiveness, Convision for
your sales team and then your conversion in terms of your lead
management. So if your conversion rate is
low then that shows you that your marketing is not effective.
Hope that makes that clear. OK, so these are all very web
focused, but they they're applicable no matter what your
type of business is. So those last four customer
acquisition costs, customer life type, lifetime value, customer
churn rate and conversion rate are really, really critical and
very much more Monday business focused.
But we're going to finish off with three figures that are more
kind of standard business. One is #8, which is return on
investment. So you hear our ROI all the
time. What is the ROI and what that's
about and this is very relevant to business cases we talked
about last week, is return on investment is the measure of
profitability of a certain investment, OK.
It is calculated by dividing the net profit from an investment.
So how much money the investment made for that particular change
or investment or project by the cost of the investment.
A higher return on investment indicates an investment is
generating a good return. And when we talk about
investors, they are looking for a return on investment.
OK, so if I am buying shares for your company, if I buy 1000
shares for a dollar each, I've got 1000 shares worth a worth
$1000. I would expect most companies
would expect a 1010 to 12% return on investment.
That's a standard return on investment.
So that the share price didn't go up to $1.10 over a certain
period, usually a year or so then, and the company isn't
generating a 10% increase in a year, it's usually not worth my
time. Now it can go up and down.
Companies fluctuate, but over a long two year periods the
average return on investment you would hope would be $10.
Sorry, 10% at least 10 to 12% / a period.
So some years it might be 20, some it might be 5.
Now that figure there is exactly the same figure as we talked
about before that you're looking at when you're like deciding
whether or not you want to put your money in the bank or you
want to put it in the company. And some companies have really,
some countries have really low interest rates.
I think the states does and like it's usually linked to your
mortgage rates, whereas in New Zealand we usually have a little
bit higher interest rates. At the moment, I think the
average interest rate for example is around for mortgage,
it's around 8%, which is pretty damn high and it's because
inflation's high and that will probably drop soon hopefully.
And if you put money in the bank, the bank will, you know,
make their margin and probably give you 6%.
So if you put your money in the bank, then you hope to get 6%
back a years later, which is the benefit of having high interest
rates. Now if you're investing a
company, you're taking a higher risk than you are in the bank
most of the time that that would be the case unless there was a
global recession, for example, but that would affect the
company too. And if the company was a large
company and you knew all about it and they were consistent for
say, 50 years, generating a 12% return year on year, then of
course it would be a good investment.
But it was company that you didn't know anything about.
You wouldn't just put your money in there, You would do something
called diversification and you invest in, say, maybe a
portfolio. But this is the figure that this
is what people were talking about.
And if I own a company so I'm the only shareholder or I'm the
director, for example, I would hope to get 12% back on my
return or otherwise I might pull all my money out and put it in
the bank. Does that make sense?
So the return on investment is very, very critical.
And again, that might be very hard for you to figure out in
terms of the return on investment of your actual
company. But you can use return on
investment when you do your business cases.
So is this project worth doing? OK, then we're gonna look at 9,
which is the average order value.
So this is the average, the average order value.
The aov #9 is the average amount of money spent per order.
OK, so it is calculated by dividing the total revenue by
the total number of orders. So this is just indicating the
size of purchase. So if you would like for
example, let's use an example of a supermarket again, it probably
isn't really that helpful to just have someone come in and
buy one item. You kind of want them to come in
and buy lots of items. And so because you've got a low
margin and you really want people to come in and buy a lot
of stuff at once and especially if it costs you money to get
them in the store in the 1st place.
So you really want people to buy more stuff.
So this is shows if your cross sell and up sell strategies are
working and so you want a high average order value that
indicates that customers are making larger purchases.
So that might be relevant to you.
It is relevant to some industries.
I think that's really important and you know by the more volume
for example, that's really important.
Have you went to a petrol station?
Everyone was in the queue buying $5 worth of petrol.
You're clogging out the lines. You kind of really want to sell
them a pie and you want them to fill their tanks up.
So you know that could be something that affects your
business. So that that's just something to
keep in mind, that's more of a traditional value and sorry
statistic. And #10, #10 should not be
looked at lightly. And you can actually, this is
actually really, really, really important statistics and the
statistic is your MPs. So we call that your Net
Promoter Score. OK, Net Promoter Score is a
measure of customer loyalty. It's really, really important.
It's a a calculation that's done in a certain way to really
figure out who is advocating for you.
OK. You calculate it by asking
basically through surveys and our large marketing companies
help with us. But you can do it just through
it through a Google form if you want to.
It is calculated by asking customers how likely they are to
recommend your company to others.
OK, so we talk about this because we talk about the fact
that if people are promoting you, they love you.
They might like your product and service, They might like the
fact that they can buy their cat food from you.
But if they say they are bloody awesome, and I'm telling my
friends, that's showing you how your viral marketing is working.
So a higher MPs indicates that customers are satisfied with you
and they're all also likely to promote.
So they're going to tell their friends and that means your
marketing is great, but it also means that they're really loyal
to you, right? They've got more than just the
superfiction official connection with you.
So usually sometimes when people go over and above with with
their service or you know, they make a mistake that they create
it really well, people go onto social media and they'll say,
hey look, I dropped my car off at the panel beaters and it was
a wreck and I was really worried about it and they did such a
good job. And then when I went back, they,
you know, they told me what they did and they made it easy and
they gave me a car that I could borrow for free while my car was
in the shop getting fixed. You may advocate for them and
that's you can have have you then got asked about, you know,
Mark's panel beating store and I said how likely would you be to
recommend this company to your friends and family?
And you were like very likely then that's a really good thing
And if they had lots of customers who were like that,
then their Net Promoter score would be really high and that's
that's that's a really important measure.
So they are 10 statistics that I think every business owner and
definitely BA should know about. These stats provide valuable
insights in terms of the performance of the company.
It can help you make more informed decisions around your
operations indicator, around profitability and how you can
reach the strategic goals. So hope you enjoyed the show, It
could be dry for some of you, but these are stats you should
really know if you've heard something, an acronym or you've
heard that, that you don't know about.
Give it a bit of a Google, understand that there's some
great material online and yeah, I'll see you next time.