Replacing Revenue Growth as a Business Metric?

    

business metrics

Over the past week, India, China, and the United States have all reported their current and forecasted economic growth rates and business leaders are trying to determine the business impacts for the both the short and long runs.

According to the latest World Bank economic forecast, India will have about 7.6% economic growth of their Gross Domestic Product (GDP) during 2016. If this forecast is correct, then India will see modest growth next year for the sixth year in a row.

Similarly, China continues to struggle with sustainable double-digit growth as once proclaimed and forecasted. During the last five years, the growth has been shrinking and the forecast is expected to decline again.

As part of new economic growth reforms to jump-start their economy, the Chinese government made an unprecedented announcement last week that they are abolishing the controversial one child policy to spur long term economic growth. It will be at least several years before there is a significant impact on their domestic economy and potentially global economies.

As we know, the United States has had very weak GDP growth and it is expected to continue to be weak into 2016. The Federal Reserve will keep interest rates low hoping that it will somehow stimulate some sort of spurt.

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But what if there is no significant economic growth during the next year or during the next 10 years? What if the global economy and the global population has reached an equilibrium and growth is something that is no longer guaranteed simply by more people on the planet?

If GDP growth remains flat and insignificant, revenue growth may become less and less of a primary business performance metric. So what would the top business performance metrics of success be? Having foundational business acumen skills will help answer that question.

I am of the belief that over the next few years the lack of economic growth and related revenue growth will result in new business performance metrics. These new metrics will evolve and impact how investors and shareholders evaluate and value the organizations they invest in which in turn will have an immediate impact on business strategy and business decision making.

Here are three metrics that I believe will replace "growth" in the new global economy:

Increased operational margin
Operational margin is defined as the profit being generated by the operations of the business which is revenue less the cost of goods sold and operating expenses. Increased operating margin means creating greater efficiencies in the business primarily by reducing operating expenses.

Economic profit
Economic profit is defined as the profit of the business less capital charge (an interest rate called the weighted average cost of capital). With interest rates remaining low, organizations taking on debt to grow the business will need to become more effective at making the right investments that drive profitability.

Share of customer spend
Share of customer spend is defined as a percentage of the total budget a customer spends on the products /services you supply to that customer. For example, Advanced Micro Devices has about 12% of the share of computer manufacturer customer spend and central processing units of computers.

Business leaders and decision makers need to pay close attention to the GDP growth rates and will need to adjust how they measure the financial success of their strategies.

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Robert Brodo

About The Author

Robert Brodo is co-founder of Advantexe. He has more than 20 years of training and business simulation experience.