The Numbers Every Owner Should Know
Eight metrics that show how your business really performs, what they mean, and how to calculate them.
Revenue is the number most owners know by heart. It is also the number that tells you the least. Two businesses with the same sales can have completely different profits, cash positions, and futures.
A handful of metrics, checked monthly, give you a much clearer picture. You do not need all of them on day one. Start with margins and break-even, then add the cash and customer metrics as you grow.
The eight numbers at a glance
| Metric | What it tells you | Generally better when |
|---|---|---|
| Gross margin | Share of sales left after direct costs | Higher and stable |
| Net margin | Share of sales left after all costs | Higher |
| Break-even | Sales needed to cover all costs | Lower, or well below actual sales |
| Days sales outstanding | How fast customers pay | Lower |
| Inventory turns | How fast inventory sells | Higher, without stockouts |
| Cash conversion cycle | Days cash is tied up in operations | Shorter |
Two more, customer acquisition cost and lifetime value, round out the list. They are covered below.
Margins: how much you keep
Gross margin is revenue minus cost of goods sold, as a percentage of revenue. It shows whether your pricing covers the direct cost of what you sell. Net margin is net income as a percentage of revenue, after rent, payroll, interest, and everything else.
Margins vary widely by industry, so compare yourself mostly to your own history and to peers in your field. If gross margin slips a few points, look at pricing, supplier costs, and waste. See pricing for profit and raising prices.
Break-even: your survival line
Your break-even point is the sales level where profit is zero. Below it you lose money; above it every additional sale contributes profit. Knowing it tells you how much cushion you have and what a new expense really requires in added sales.
Try it
Break-Even Calculator
Enter your fixed costs and gross margin to find the monthly sales you need to break even.
Break-even point
445 sales
$20,000 in revenue
Each sale contributes
$27.00
60% contribution margin
Monthly profit
$4,200
at 600 sales
Break-even = fixed costs ÷ (price − variable cost). Every sale past this point adds its full contribution margin to profit.
Cash speed: DSO, inventory turns, and the cash cycle
Days sales outstanding (DSO) is the average number of days it takes customers to pay. If your terms are net 30 and your DSO is 52, customers are paying three weeks late on average. Inventory turns count how many times you sell through your average inventory in a year; a low number means cash sitting on shelves.
The cash conversion cycle pulls these together: how many days pass between paying for materials or inventory and collecting cash from the customer. A shorter cycle means you need less cash to grow.
Small changes, big cash
If you sell $1.2 million a year on credit, each day of DSO represents roughly $3,300 of cash waiting in receivables. Cutting DSO by 10 days frees about $33,000. See getting paid faster.
Customer economics: CAC and lifetime value
Customer acquisition cost (CAC) is what you spend on marketing and sales to win one new customer. Customer lifetime value (CLV or LTV) is the gross profit you expect from that customer over the whole relationship. If lifetime value is not comfortably above acquisition cost, growth loses money. Many owners look for lifetime value of at least three times acquisition cost as a rough benchmark, but it varies by business.
Owner story
Priya's revenue grew 40% in a year, and her bank balance shrank. When she finally calculated her numbers, she found her paid ads cost $62 per new customer, while the average customer bought once and generated $35 of gross profit. She shifted budget toward email offers for repeat customers and a subscription option. Her revenue growth slowed, but her cash started growing again.
Illustrative composite, not a real customer.
Quick check
Your fixed costs are $30,000 a month and your gross margin is 40%. What are your break-even sales?
Words to know
- Gross margin
- Revenue minus direct costs, as a percentage of revenue.
- Days sales outstanding
- The average number of days it takes customers to pay their invoices.
- Cash conversion cycle
- The days between paying for inputs and collecting cash from customers.
- Customer lifetime value
- The total gross profit you expect from a customer over the relationship.
Finished reading?
Track your progress through Stage 2: Manage.
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