Tracking the performance of your business shouldn’t be left to guesswork and approximations. To be truly aware of the strengths and weaknesses of your company, it is imperative to know the whole story from the beginning to the end. Right from decision-making to procurement, from manufacturing to marketing, from sales to follow-ups, and then strategizing and decision-making again, every action happening in a business needs to be backed up by solid data and insights.
This is where operational metrics come into play. By providing you with a visual form of the data that your company collects, operational metrics indicate where your company is doing well and where it needs to do better. Strategizing is made simpler when there is performance data ready at hand for perusal, which is why operational metrics are important to track.
However, there is a multitude of operational metrics that businesses track on a daily basis; it isn’t possible to look at all of them at the same time. Revisiting a few of the key operational metrics that matter more than the others works well too. Let’s understand what these key operational metrics are that every business should track, by reviewing the following topics:
- What are Operational Metrics?
- Why are Operational Metrics Important?
- Types of Operational Metrics
- 10 Key Operational Metrics to Track Regularly
What are Operational Metrics?
Operational metrics are the key performance indicators (or KPIs, for short) of all the activities happening in your business. These performance indicators help you with the following:
- Keep track of the efficiencies of various operations in your business
- Strategize accordingly based on the desired key performance indicator benchmark for a particular process
- Allocate resources and mobilize workforce based on the fluctuations observed in the key performance indicators
Operational metrics are a way of measuring the efficiency of workflows in quantified numbers that help the decision-makers understand the situation and condition of a process of a business. Say, for example, that the Customer Acquisition Cost, or CAC, of your business, is supposed to be under $5 as per the industry average; however, you notice that your CAC for the last quarter was $7. This helps you see that there is a problem in the operational cascade that is raising the acquisition cost for new customers. The decision-maker suite is then prompted to strategize accordingly, such that the CAC can be lowered to industry benchmarks and, if possible, even further down.
Tracking a few key operational metrics has more benefits than one. Let’s see why it is important to track the key operational metrics of your business.
Why Track Operational Metrics?
To stay ahead of the competition, period. Business is done to make profits, in every way possible – and one of these ways includes optimizing operations for maximum gains. This cannot be done by manual observations of loading vans leaving the office or by counting punch-ins and punch-outs each day. The true measurement of progress is through measuring the efficiencies of every single process involved in the day-to-day activities of a business. The ambit of operational efficiency includes the following aspects of a business:
- Manufacturing efficiency
- Staff productivity
- Distribution efficiency
- Marketing effectiveness
- Finance planning
Knowing that there are benchmarks associated with the operational efficiencies of each of these departments, operational metrics help the decision-makers strategize better so every sphere of their business is working optimally. Let's now understand each of these metrics to know them better, and pinpoint the key operational metrics among them.
Types of Operational Metrics
As discussed above, there are operational metrics in every sphere of business. Let’s take them one by one.
Manufacturing Operational Metrics
Executives responsible for tracking operational KPIs need to be aware of the following operational metrics in manufacturing:
- Demand forecasting. This operational metric helps managers forecast the raw material requirement based on predicted demands in the near future
- This operational metric tracks the rate of production generated by equipment installed in factories or industries. This is one of the most important KPIs a business needs to track
- Changeover time. This operational metric defines how efficiently an operation shifts from one task to another – for example, handling staff shifts
- Machine downtime. It is important to know your throughput after factoring in scheduled and unscheduled machine downtimes. This operational metric helps your business track that
- Cycle time. This operational metric establishes the average time needed to produce one good
Staff Productivity Operational Metrics
The following operational metrics are related to staff productivity:
- Utilization rate - This operational metric indicates the way your staff is spending time – whether working on non-billable tasks, waiting for work, working overtime, etc. It helps you understand how optimally your business is utilizing its workforce
- Employee turnover - This operational metric tells you how frequently your business needs to replace its staff due to attrition and turnover. You want to keep this as low as possible
- The amount of time your employees are present at work also determines efficiency. This operational metric helps you track how engaged your employees are
Distribution Operational Efficiency
The operations of your company largely depend on back-end supply chains and logistical management. Getting visibility into these operational metrics helps you keep things on track:
- Fleet asset efficiency. Use this operational metric to measure how effectively your business utilizes its fleet
- Delivery time. This operational metric helps you count the number of on-time deliveries vs. the delayed ones
- Carrying cost. As a products business, there are always items stored in your inventory. Measuring the carrying costs thus becomes an important operational metric
- Warehousing efficiency. This operational metric helps you understand the space utilization efficiency of your business
Marketing Efficiency Operational Metrics
Spending money blindly on marketing doesn’t solve the purpose. Use these operational metrics to understand marketing better.
- Cost Per Click. Use this operational metric to measure how effective your online campaigns are
- Conversion rate. How many of your leads convert into paying customers? This operational metric helps you track that
- Customer Acquisition Cost. How much is your business spending to acquire one new customer? This operational metric tells you your per-customer acquisition cost
- ROI on Advertising. This operational metric tracks marketing spend with respect to revenue, helping you see the effectiveness of your advertisements
Financial Operational Metrics
No business has unlimited resources to spend blindly. It is important to know how and where every penny is being invested. Track the following finance operational metrics:
- Operating cash flow. Track your daily cash in and out of the company using this operational metric
- Cash conversion cycle. Measure the time it takes for a product in your inventory to finally bring cash into the company using this operational metric
- Operating profit margin. This operational metric helps you track the profitability of your company
- Quick ratio. This operational metric helps you understand how well your company is able to cover the short-term liabilities
10 Key Operational Metrics to Track
While the operational metrics change on the priority list depending on the industry your business functions in, there are certain key performance indicators that largely remain unchanged. Here are the 10 key operational metrics to track to assess the competitive standing of your business.
At the end of the day, the money your business made for itself is the ultimate indicator of how well it is performing. This one operational metric, when high enough, gives you the assurance that your strategies employed currently – whether in marketing, finance, or any other aspect, are working as they should be. Sales revenue can be calculated as follows:
Sales Revenue = Income from sales – Returns in sales
For example, say for every $100 sale your company deals with $30 returns. Your sales revenue would then be ($100 - $30) = $70.
Gross Profit Margin
This operational metric helps you understand the division of your sales dollars – how much you made in profits, and how much went into other costs. It is expressed as a percentage. The formula to calculate gross margin is:
Gross margin = [(Sales revenue – COGS) / Sales revenue] x 100
For example, say your company has a revenue of $1,000 and a COGS of $600. Your gross margin would then be [($1,000 - $600) / $1,000] x 100 = 40%.
Net Profit Margin
Net profit margin is an operational metric that helps you see just how much profit was made on goods sold after discounting all the sales expenses. The formula for net profit margin is:
Net profit margin = Revenue – Sales expenses
Say, for example, that your company makes a revenue of $1,000 by incurring an expense on sales of $300. The net profit margin would then be $1,000 - $300 = $700 for your business.
Traffic on Your Website
The world is online today, from shopping to services. It makes total sense to have an operational metric assigned purely to measure how well your website is doing. A few things you can do to measure the operational efficiency of your website are listed below:
- Effectiveness of SEO
- Social media marketing metrics
- Coverage in news and other public media
Improving the footfall on your website can be achieved through investing more time and budget to create holistic, intuitive experiences for customers on your website.
Conversion rate is an operational metric that directly tells you how effective your marketing and customer convincing strategies are. To be able to convert the maximum number of leads into paying customers is an ideal situation – this performance needs to be tracked. Conversion rate can be calculated as follows:
Conversion rate = New leads during a fixed period of time / New paying customers during that time
Use this metric to strategize for your marketing and advertising based on sales funnel dynamics.
Acquiring new customers is one thing; being able to retain old customers is another. This operational metric tells you how satisfied your customers are with the services your business is catering to them. A good retention rate leads to advocacy, which is very good for your brand. The formula to calculate customer retention rate is as follows:
Customer retention rate = [(total customers at month-end – new customers in that month) / total customers at the start of the month] x 100
For example, say your business started with 100 customers in December and gained 25 new ones. December ended with your business owning 80 customers. The retention rate would then be [(80 – 25) / 100] x 100 = 55%.
Customer Lifetime Value
This is an important operational metric for businesses as it talks about how lucrative each customer is for your business, during the time that he stays with your brand. In short, how much can a business stand to profit from a single customer? The formula for this operational metric is as follows:
CLV = average customer retention time x average sales x average number of transactions per customer
Using this operational metric, you can strategize for better customer retention, improvement of customer service, and understanding the paying capacity of a customer.
Customer Acquisition Cost
Companies spend a lot on marketing and advertising. The primary objective here is to acquire new customers. This operational metric helps you understand how many dollars your business spends to acquire one new customer. Ideally, this metric should be as low as possible.
CAC = marketing + advertisement costs / new customers acquired
It is important to look inwards as well in order for a business to truly grow and be successful. An operational metric that helps the administration measure employee satisfaction is thus needed in the mix. This helps boost employee productivity. Conducting surveys and circulating feedback forms are the best way to understand how satisfied your employees are.
Setting Timed Goals
The most important operational metric of all is how well your business is able to time itself on goal achievement. How realistic are your goals? How long is it taking for operations to achieve that goal? Keeping tabs on resource allocation, productivity, efficiency, and finances is made easier when there is a definitive goal to look forward to achieving.
Operational Metrics Make Business Better
Gone are the days of running an enterprise based on gut feeling and intuition. This is the era of data, reporting, analytics, and tangible insights on every aspect of business performance. Operational metrics help you keep a track of the health of your business, in every sphere.
Operational metrics are the measure of a company's performance across all aspects - be it financial, marketing, distribution, production, staff-related, or sales. They tell you about how well your strategies have performed so far, and where there is a need for attention. Across all aspects of a business, there are 10 key metrics that every business owner should track:
- Sales revenue
- Net and gross profit margin
- CAC, CLV
- Employee satisfaction
- Conversion and retention rates
- Digital channel performance
Knowing where your business stands at a given point in time helps you strategize better.