Sales Growth Analyze the pace at which your sales revenue is increasing or decreasing. Overview Sales Growth metrics measure the pace at which your organizaon's sales revenue is increasing or decreasing. This is a key metric for any organizaon to monitor since it is an essenal part of growth projecons and is instrumental in strategic decision- making. Monitor this metric over mulple me periods to gain a clear indicaon of growth trends and normalize your values to account for monthly or quarterly spikes in revenue. At the highest level, the sales growth metric is used to provide execuves and sales directors with an assessment of the sales organizaon's performance. However, this metric can also be broken down to show how each sales team or sales representave can contribute to achieving organizaonal goals. Rather than providing each sales team with a broad objecve of increasing total sales by 20% this year, provide aainable (yet challenging) objecves that will help them effecvely contribute to achieving your business objecve. Key terms Current sales revenue: The total dollar value of sales during the current me period. Previous period sales revenue: The total dollar value of sales during the period me period. Success indicators A posive sales growth percentage over the specified me period.
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Sales Growth
Analyze the pace at which your sales revenue is increasing or decreasing.
Overview
Sales Growth metrics measure the pace at which your organization's sales revenue is increasing or decreasing. This is a key metric for any organization to monitor since it is an essential part of growth projections and is instrumental in strategic decision-making. Monitor this metric over multiple time periods to gain a clear indication of growth trends and normalize your values to account for monthly or quarterly spikes in revenue.
At the highest level, the sales growth metric is used to provide executives and sales directors with an assessment of the sales organization's performance. However, this metric can also be broken down to show how each sales team or sales representative can contribute to achieving organizational goals. Rather than providing each sales team with a broad objective of increasing total sales by 20% this year, provide attainable (yet challenging) objectives that will help them effectively contribute to achieving your business objective.
Key terms
Current sales revenue: The total dollar value of sales during the current time period.
Previous period sales revenue: The total dollar value of sales during the period time period.
Success indicators
A positive sales growth percentage over the specified time period.
Sales Opportunities
Organize prospects based on opportunity value and probability.
Overview
The Sales Opportunity metric organizes prospects based on opportunity value and the probability of closing the sale. Each prospect has an estimated purchase value associated with them to help your team prioritize their efforts.
Prospects are sorted according to the likelihood of a win (stage) and the value of a win (estimated value). Each stage may have a weighted value associated with it to demonstrate the probability of making the sale. For example, a prospect rated as "negotiated" may have a weighted value of 0.5 applied to their estimated purchase value. Therefore, a prospect with a "negotiated" stage and an estimated purchase value of $10,000 will have a weighted value of $5,000.
Key terms
Stage: Based on the type of contact your sales team has had with the prospect. Stages may include proposal (sales quote sent and received), qualified, or negotiation.
Weighted value: A multiplier that is applied to the estimated value of a prospect based on the probability of closing the sale.
Success indicators
Increased value per prospect. Increased probability of win for each stage. Improving the flow from one stage to the next.
Product Performance
Rank products based on revenue performance.
Overview
The Product Performance KPI ranks product sales based on revenue performance to inform your sales team which products are selling well. At the same time, you should rank the poorest performing products to determine which products are failing to resonate with your customers.
When monitoring this KPI, it's important to consider the specific contexts surrounding each product. For instance, is a certain product receiving a boost due to a viral marketing campaign? Or, are you experiencing a slump because your competition is offering a similar product at a lower price?
Product performance doesn't always map directly to revenue performance. For instance, low price, high volume products may account for more than 50% of your products shipped and be essential to your business model, but these products may not crack into the top 5 products in terms of revenue. As with any KPI, you need to use measures and metrics that are consistent with your business model and objectives.
Key terms
Revenue: The total dollar value of revenue generated over a specific time frame.
Units sold: The total number of units of a specific product sold. See also, "Units per Transaction."
Purchase value: The total dollar value of each purchase order. See also, "Average Purchase Value."
Success indicators
Increase in product sales revenue. Increase in number of units per order. Increase in the average dollar value of each purchase order
Measure and compare current sales to a target or past performance.
Overview
The Sales Target KPI measures current sales (either dollar value or number of wins) and compares that value to a target or past performance. This simple sales KPI taps into the competitive nature of sales teams by visualizing their performance in a tangible way.
The key to this KPI is setting an appropriate sales target. This requires a deft touch, as a goal that is set too high will be viewed as unachievable and will drain morale; on the other hand, a goal that is set too low will fail to motivate your team to go that extra mile. One of the most common ways to develop this KPI is to compare current performance to the previous period, for example, showing new wins this month compared to wins last month.
Key terms
Wins: The number of new customers over a certain time period. Revenue: Income received through sales activities.
Success indicators
Surpassing a sales target or the previous period's value.
Average Purchase Value
Measure the average value of purchase orders.
Overview
The Average Purchase Value KPI measures the average value of each purchase order your sales team processes. This KPI is used to quantify the potential dollar opportunity associated with each lead and help you to accurately predict the value of a win.
This KPI can be combined with a number of other KPIs and metrics to provide a clear picture of consumer purchase behaviours. For instance, consider pairing this KPI with the units per transaction KPI to help your supply chain accurately forecast inventory levels.
Key terms
Purchase order: A document used to indicate the type of product ordered, number of units, and agreed upon prices.
Purchase value: The total dollar value of a purchase order. Units per transaction: The number of units sold in a purchase order.
Success indicators
An increase in order value. An increase in order frequency coupled with stable or increasing purchase
Monitor which contact methods are most effective at generating sales.
Overview
The Sales by Contact Method metric measures which contact methods are the most successful at generating sales, such as email, telephone, or in person. It may be worthwhile to consider this KPI in conjunction with sales rep performance metrics, as some reps may be more effective using different contact methods.
It's also important to consider the costs associated with each contact method to understand when to use different types of tactics. For instance, in person contact methods tend to have higher win rates, but are more expensive upfront because they include travelling expenses. Perhaps consider reserving in person contacts for high value prospects, and rely on email or phone contact for other types of prospects.
Key terms
Contact method: The method by which your sales representative communicates with customers. Methods range from in person to self-service.
Contact cost: The costs associated with contacting a customer such as long-distance phone charges or travelling expenses.
Success indicators
Increasing sales volume/value for a method with a low cost per contact. Decreasing the percentage of sales associated with a low yield, high cost per
Measure the value of bookings over a specific time period.
Overview
The Sales Bookings metric measures the value of bookings over a given time period, where a "booking" is a won, signed, or committed sale. It's important to note that a booking isn't necessarily invoiceable until you have delivered the product or completed the required services.
This is a high level metric that is designed to be consumed by executives and financial analysts, and it will be used in strategic decision-making and forecasting. Depending on your business model, bookings can be categorized by region, by sales representative, or client.
Key terms
Booking: A won, signed, or committed sale where the purchase order has been received and approved.
Success indicators
An increase in the dollar value of bookings for a given time period.
Quote To Close Ratio
Measure the number of formal quotes sent compared to the number of deals closed.
Overview
The Quote to Close KPI measures the number of formal quotes sent out by your sales team compared to the number of deals closed. To formalize a quote, send out a quote that can be documented and that even requires a signature or some other form of explicit acknowledgement. This KPI is used to help prioritize how much time your sales team spends on any given opportunity and to gain an understanding of your key conversion metrics.
The quote to close KPI can be used in conjunction with the current opportunities metric to assess the probability of closing a particular deal. If your sales team has a strong quote to close rate, you can say with certainty that opportunities with a quote in hand are highly likely to convert and are well worth your team's time. Depending on your industry and business model, however, your quote to close may be very high in which case you may want to consider automating the quotation process to maximize your sales team's efforts.
This KPI represents a point where sales and marketing intersect. Marketing's goal is to attract qualified leads, and this KPI provides an indication as to how qualified those leads actually are. If your lead to quote ratio is high, then you know that leads are unqualified and not entering the sales pipeline for the right reasons. Consider pairing this KPI with the cost per lead KPI to provide your marketing team with much needed ROI data and to foster improved communication between sales and marketing.
Key terms
Quote: A formal or informal proposal for a sales transaction. Lead: New prospects generated by a marketing campaign. Wins / Closed deals: New customers generated through sales efforts.
A low or decreasing quote to close ratio. A low or decreasing lead to quote ratio. An increase in the quality of leads.
Sales per Rep
Measure the performance of each of your sales reps or sales teams.
Overview
The Sales per Rep KPI measures the ability of each of your sales reps or sales teams to generate revenue for your organization. By their very nature, sales teams are competitive, so providing ubiquitous access to this KPI may help foster a healthy level of competition amongst your team. It's important to provide your team with ambitious, but realistic goals to encourage them to go that extra mile (see "Sales Target").
One of the most important components of this KPI is to establish a baseline when comparing your sales reps. Not all sales reps are created equally (so to speak) and your baseline should account for differences such as seniority, location, and whether they are inbound or outbound sales. Otherwise, this KPI should be used as performance tool to foster improvement and growth within your team.
This KPI can also be used to hone in on the strengths and weaknesses of your sales reps. For instance, perhaps one sales rep performs poorly during in person contacts but performs exceedingly well when using email contacts (see "Sales by Contact Method"). By the same token, teams selling different products shouldn't be compared as the price, volume, and interest level may be very different.
Key terms
Revenue: Income received through sales activities. Contact method: The method by which your sales representative
communicates with customers. Methods range from in person to self-service.
Increased average revenue for all sales reps or teams.
Marketing KPIs
Return on Investment (ROI)
Measure the ability of marketing campaigns to generate new revenue.
Overview
The Return on Investment (ROI) KPI measures how much revenue a marketing campaign is generating compared to the cost of running that campaign. In other words, ROI answers the questions, "Are we recouping what we spend on marketing in new sales?" ROI is the single most important KPI for any marketing team to monitor and is the first KPI your marketing executive will ask for when assessing your team's performance.
To calculate ROI, you will need to track the number of leads generated through each of your marketing campaigns, such as a banner ad or AdWords campaign. Next, you will need to determine the opportunity value of each lead. To calculate this, find your average value per win and divide that value by your average lead to win ratio. For example, if you know that the average value of a win is $20, and your lead to win ratio is 10:1, then you can say that the average value of a lead is $2. This number will provide an approximate value to help you assess the performance of your campaign as you bring in each new lead.
Despite ROI being the quintessential marketing KPI, it can be quite difficult to come up with a definitive ROI figure. One of the main difficulties facing marketers is that lead conversion is typically attributed to the last interaction or click associated with completing a goal, such as downloading a PDF on a website. The problem is that someone may have viewed a banner ad but didn't click on the ad at that time, instead returning to your site weeks later to convert. That conversion may be attributed to another channel like social media or organic search, while the banner ad played a key role in that conversion process. Despite this problem, you will need to have a firm grasp of the value of leads and wins that can be directly attributed to each marketing campaign.
Key terms
Leads: New prospects generated by a marketing campaign.
Incremental sales: New revenue generated by a marketing campaign (see "Incremental Sales").
Wins: New customers generated by a marketing campaign.
Success indicators
Incremental sales are greater than campaign investment.
Purchase Funnel
Understand your customer acquisition process from awareness to purchase.
Overview
The Purchase Funnel analyzes your customer acquisition process to help you understand how potential customers discover your product or brand and, more importantly, how they eventually become a loyal customer. The purchase funnel (alternatively called the marketing funnel) is typically broken down into five stages: awareness, interest, consideration, preference, and purchase. From a measurement point of view, this may map to a variety of sales and marketing channels from social media and web visits to mailing lists and sales contacts.
The key to the purchase funnel is analyzing conversion rates from one stage of the funnel to the next. The strength of the funnel is the ability to zero in on your strengths and weakness. For instance, you may have strong brand awareness (represented by a high number of web visitors) but your ability to convert leads into wins may represent a weak point. The funnel allows you to see and act on this information.
Key terms
Funnel stage: Five key stages that represent the typical customer acquisition process. Stages include: awareness, interest, consideration, preference, purchase.
Conversion rate: The percentage of people that move from one funnel stage to the next.
A high conversion rate through all stages of the funnel. High volume through each stage of the funnel. Improving conversion rates for stages performing poorly.
Goal Completion Rate
Measure how effective your campaigns are at prompting your audience to complete a goal.
Overview
The Goal Completion Rate (GCR) metric measures the number of people that complete a specified marketing goal, such as signing up for a trial or subscribing to a mailing list. Marketing metrics like GCR are an important part of the purchase funnel as it typically demonstrates your conversion rates from the awareness stage to the consideration stage. Similarly, GCR should be paired with sales KPIs such as your lead to win rate to provide an indicator as to the quality of leads your marketing efforts are attracting.
The GCR metric is used extensively in website optimization and A/B testing (also called split tests), since GCR is a leading indicator of how well your website resonates with your target audience. Content strategist and website analysts will use your site wide GCR as a baseline value to compare all the pages on your website. Pages below the threshold require optimization, while pages above the threshold should be analyzed so you can repeat your success elsewhere.
Key terms
Goals: A marketing objective for your audience to complete, such as subscribing to a mailing list.
Lead: An individual that has expressed interest in your product or service by completing a goal.
Completion rate: The number of web visitors divided by the number of goals completed.
Success indicators
A high goal GCR shows that your campaign is encouraging your target audience to act.
A high lead to win rate shows that your campaign is generating highly qualified leads for your sales team.
Incremental Sales
Demonstrate how your marketing campaigns are resulting in increased sales revenue.
Overview
The Incremental Sales KPI measures the contribution of your marketing efforts to increasing sales revenue. This KPI emphasizes the close relationship between sales and marketing, and how that relationship benefits your organization. Marketing attracts qualified leads, and sales converts those leads into paying customers (which, hopefully, become brand advocates to further fuel marketing efforts).
The incremental sales KPI is one of the most consistent ways to measure your marketing return on investment as it demonstrates new revenue that can be directly attributed to a marketing campaign. The problem for marketing teams is that campaigns may generate new leads or sales indirectly. For example, a banner campaign with a large volume of impressions may encourage people to complete what is called a "view through conversion." This means that a visitor may see an ad, visit the website in a separate browser tab or window, and then complete a goal without actually clicking on the banner ad. The result is the same, but the path and credit for the completion are very different.
Key terms
Lead: An individual that has expressed interest in your product or service by completing a goal.
Wins: New customers generated by a marketing campaign. Campaign: A marketing communication on a dedicated channel intended for
Incremental sales that exceed the initial marketing investment. Indirect increase in sales that can be attributed to a marketing campaign.
Traffic Sources
Understand which traffic sources are driving visitors to your website.
Overview
The Traffic Sources metric measures which traffic sources are driving visitors to your website, and provides a comparison of each of those sources. The three main traffic sources are direct, referral, and search, although your website may also have traffic from campaigns such as banner ads or paid search. In addition to measuring the number of visitors from each traffic source, consider analyzing the number of goal completions from each source.
Each traffic source can be analyzed to provide more granular information about your web traffic. Search traffic, for instance, can be analyzed according to the landing page and associated keyword rankings; referral traffic can be broken down into categories such as social referrals, blog mentions, or service listings. As well, each source is an indicator of the health of your website. For instance, a high volume of referral traffic shows that your brand or website is being talked about frequently by 3rd party websites or on social media sites.
Key terms
Direct traffic: Visitors that visit your site by typing your URL into their browser, or through an undefined channel.
Referral traffic: Visitors that visit your site by clicking on a URL on another website.
Organic traffic: Visitors that discover your website by entering searching a keyword in a search engine (Google, Bing, Yahoo) and that click on your listing.
Campaign traffic: Visitors that visit your website through a dedicated campaign or clicking on a link with certain tracking parameters.
Measure keyword rankings to understand how effective your SEO efforts are at driving traffic to your website.
Overview
The Keyword Performance metric measures your keyword rankings to understand how effective your SEO efforts are at driving organic traffic to your website. Keyword rankings is a leading indicator which provides valuable information about your ability to improve on existing rankings or rank on new keywords. That said, SEO efforts need to account for the "big" marketing picture and analyze other factors such as goal completion rates and return on investment.
The search engine marketing landscape has been transformed in recent years as Google continues to release key updates such as Panda, Penguin, and Hummingbird. The net result of these updates is to counter so-called "black hat" tactics, such as questionable link building tactics and keyword stuffing, in favour of "white hat" tactics, such as social sharing and creating high quality content. As search engine marketing matures, the importance placed on keyword rankings will diminish (but not disappear), while the importance of other key metrics surrounding keyword performance will increase.
Key terms
Keyword: A search term that is entered into a search engine like Google or Bing.
Click-through rate (CTR): The percentage of people that click on a search listing compared to the number of impressions or the number of times the listing appear in search results.
Goals: A marketing objective for your audience to complete, such as subscribing to a mailing list.
Completion rate: The number of web visitors divided by the number of goals completed.
Improving rankings for a keyword or keyword group. Improving click-through rates for ranked keywords. Improving goal completion rates for organic traffic visitors.
End Action Rate
Measure how effective marketing campaigns are by monitoring the last action taken by your audience.
Overview
The End Action Rate KPI measures how effective marketing campaigns are by monitoring the last action taken by your audience. This KPI may also incorporate non-sales related objectives such as contact requests or bounce rates. While similar to the goal conversion rate KPI, end action rate provides a broad assessment of campaign performance by monitoring all possible outcomes.
The end action rate KPI is intended to provide your team with actionable information about your campaign performance. For example, if you are running a banner ad campaign with a specific landing page, you will want to monitor secondary metrics as well as goal completions. These secondary metrics will tell you how well the page resonates with your audience and if the campaign was generally well received. It's important to remember that many prospects aren't ready or willing to commit to a purchase or share contact information on their first visit to your website, but a good first impression can result in future engagements.
Key terms
End action: The last interaction a campaign visitor has with your website. Lead: New prospects generated by a marketing campaign. Wins: New customers generated by a marketing campaign.
Success indicators
Campaigns that result in a high number of leads or wins. Campaigns that generate positive events like social engagements or contact
requests. A reduction in negative events like bounces and exits.
Measure the cost-effectiveness of marketing campaigns.
Overview
The Cost per Lead metric measures how cost-effective your marketing campaigns are when it comes to generating new leads for your sales team. This metric is closely related to other key business metrics such as the cost to acquire new customers. The purpose of this metric is to provide your marketing team with a tangible dollar figure so they understand how much money is appropriate to spend on acquiring new leads.
The cost per lead metric also provides important data to use in your return on investment calculations. In fact, each stage of the purchase funnel should have similar metrics associated with it, such as cost per visitor and cost per win. Likewise, these metrics can be used to monitor individual campaigns such as AdWords, banner ads, or social ads, or the sum of your marketing efforts.
Key terms
Lead: An individual that has expressed interest in your product or service by completing a goal.
Success indicators
A low cost per lead with a high volume of quality leads.
Measure how effective email marketing campaigns are at engaging your audience.
Overview
The Email Marketing Engagement Score metric measures how effective your campaigns are at engaging your audience by tracking key metrics like open and click rates. Each of these metrics represents a different type of engagement which will help you assess the performance of your campaign. Open rates are linked to subject line performance, the credibility of the sender, and the time the campaign was sent; click rates, on the other hand, are indicative of how well the content resonates with the audience and the relevance of the message.
Successful email marketers extensively A/B test subject lines, call out text in an email, and the time emails are sent. The result is an email marketing program that is fine-tuned to your subscription list with campaigns capable of generating a high level of engagement. As with any marketing activity, email campaigns are designed to generate leads for your business. Therefore, engagement scores should be tracked alongside goal conversion rates and social interactions to demonstrate marketing ROI.
Key terms
List subscribers: The number of people who subscribed to an email list maintained by your marketing team.
Open rate: The percentage of list subscribers that open an email message sent by your team.
Click rate: The percentage of list subscribers that click links included in your email message, including calls to action, social share or follow links, or generic links back to your website.
Success indicators
A high and/or improving open rate. A high and/or improving click rate.
Measure how effective your social media campaigns are at fostering positive interactions with your audience.
Overview
The Social Interaction KPI measures how effective your social media campaigns are at fostering positive interactions with your audience on a social media platform. Key interactions can play a pivotal role in a post or story going viral, so ensuring you are nourishing the right types of interactions is very important. As well, a strong social media measurement strategy will map these interactions to other marketing goals, such as website conversions or new wins.
When measuring social interactions, it's important to remember that not all social interactions are equally valuable; each social platform comes with a number of different ways to interact with your audience. For example, one could argue that a "retweet" is more valuable than a "favourite" on Twitter because a retweet ensures the content stays in circulation longer. Similarly, different social media sites will have varying importance to your brand. One brand may find that Facebook is a hotbed of positive engagement, while another brand really hits its stride on Pinterest.
Key terms
Interaction: A communication between an audience member and your brand's social profile. This may take the form of platform specific interactions such as Mentions on Twitter, Likes on Facebook, or +1's on Google+.
Success indicators
A high level engagement that corresponds to the completion of key marketing objectives.
Viral posts that require little or no nurturing on your behalf. Sustained engagement over a long period of time.
Measure the ability of your organization to pay all of your financial obligations within a year.
Overview
Current Ratio measures the ability of your organization to pay all of your financial obligations in one year. This ratio accounts for your current assets, such as account receivables, and your current liabilities, such as account payables, to help you understand the solvency of your business. Generally speaking, a ratio between 1.5 and 3 is preferable and indicates strong financial performance.
A current ratio of less than 1 indicates that your organization would be unable to meet all of your financial obligations if they came due at the same time. While this certainly is not good, it's not uncommon for organizations to operate in the red for short periods of time, especially if the business is funding growth by accumulating debt. On the other hand, a high current ratio may be mean that the business is sitting on a large amount of cash, instead of investing it back into the business.
Current ratio provides investors and financial analysts with an indication of the efficiency of your company's operating cycle. In other words, is your business able to generate a constant revenue stream and collect account receivables in a timely manner? These important questions tell potential investors a lot about the financial health of your organization.
Key terms
Assets: An economic resource that has cash value. Liability: A financial obligation that stems from previous transactions, such as
A current ratio between 1.5 and 3. A current ratio that is greater than 1 and that is stable over the long term.
Quick Ratio / Acid Test
Measure the ability of your organization to meet short-term financial obligations.
Overview
Quick Ratio measures the ability of your organization to meet any short-term financial obligations with assets that can be quickly converted into cash. This ratio offers a more conservative assessment of your fiscal health than the current ratio because it excludes inventories from your assets. Like your current ratio, a quick ratio greater than 1 indicates that your business is able to pay off all of your accounts payable.
The quick ratio gets its name from the fact that it demonstrates your ability to quickly generate cash to pay off your financial obligations. The reason inventory is excluded from this ratio is that it's assumed that you may not be able to quickly convert your inventory into cash. Quick ratio is an important financial measure, but may not give you the complete picture. For example, your organization may have a large amount in account receivables causing your quick ratio to be low while your financial health is actually quite strong.
Key terms
Assets: An economic resource that has cash value. Liability: A financial obligation that stems from previous transactions, such as
a purchase order.
Success indicators
A quick ratio between 1.5 and 3. A current ratio that is greater than 1 and that is stable over the long term.
Measure your organization's financial health by analyzing readily available assets.
Overview
The Working Capital metric measures your organization's financial health by analyzing readily available assets that could be used to meet any short-term financial liabilities. Working capital includes assets such as on-hand cash, short-term investments, and accounts receivable to demonstrate the liquidity of the business (the ability to generate cash quickly). Working capital is calculated by subtracting current liabilities from current assets.
Key terms
Assets: An economic resource that has cash value. Liability: A financial obligation that stems from previous transactions, such as
a purchase order.
Success indicators
When expressed as a ratio, a working capital greater than 1 indicates that your company can cover its current liabilities.
Measure how your organization is funding growth and how effectively you are using shareholder investments.
Overview
The Debt to Equity Ratio measures how your organization is funding its growth and how effectively you are using shareholder investments. A high debt to equity ratio is evidence of an organization fuelling growth by accumulating debt. This is a common practice, as outside investment can greatly increase your ability to generate profits and accelerates business growth; reaching too far, however, can backfire and leave the company bankrupt.
Accounts Payable Turnover
The Accounts Payable Turnover KPI measures the rate at which your company pays off suppliers and other expenses. This ratio is important for understanding the amount of cash that your business spends on suppliers during any given period. It shows how many times over the course of the year your business is able to pay off its accounts payable. Used in conjunction with Current Ratio or Quick Ratio, this financial metric shows your ability to meet your financial obligations.
The Accounts Receivable Turnover KPI measures the rate at which you collect on outstanding accounts. The problem in maintaining a large bill for a customer is that you are essentially offering them an interest-free loan. Monitoring this metric is essential to ensure that accounts receivable is collecting on bills in a timely manner. This KPI is an essential piece of understanding your organization's cash flow process.
Return on Equity
Measure profitability by examining your ability to generate revenue for each unit of shareholder equity.
Overview
The Return on Equity KPI measures your organization’s ability to generate revenue for each unit of shareholder equity. Use the following formula when calculating return on equity:
Net income ÷ Shareholder’s equity
The return on equity ratio not only provides a measure of your organization’s profitability, but also your efficiency. A high or improving ROE demonstrates to your shareholder’s that you’re using their investments to grow your business.
Key terms
Shareholder’s equity: Financing acquired through selling common and preferred shares to investors.
Net income: Also called net profit, this is the amount of earnings after you subtract cost of goods sold, taxes, and other expenses.
Success indicators
A return on equity rate between 15% and 25% is generally considered good.
Inventory Turnover
The Inventory Turnover KPI measures how often you are able to sell off your entire in-stock inventory in a given year. This KPI is closely related to your supply chain, and indicates the ability of your organization to generate sales and increase revenue. As well, it's important to move aging inventory since it the cost of carrying inventory increases at the same time the value of that inventory decreases.
The Net Profit Margin KPI measures how effective your business is at generating profit on each dollar of revenue you bring in. This financial KPI is a measure of the profitability of your business and is instrumental in making long- and short-term financial decisions. Understanding this KPI may even give you an advantage in a pricing war with your competitors. See also: Gross Profit Margin.
The Gross Profit Margin KPI measures how much profit you make on each dollar of sales before expenses. This ratio is calculated by looking at the difference between production costs (excluding overhead, payroll, and taxes). It is important to note that gross profit margin isn't a true indicator of whether your business is marking a profit – for that you will need to refer to another financial KPI: Net Profit Margin.
