Once you’ve made it through the tricky start-up period of seeding a new business, it’s time to help it grow. There are many ways to measure business growth, from revenue to website visitors. These are known as key performance indicators, and they offer a way to keep your growing business on track. Here’s how it works.
KPI definition: what are key performance indicators?
Key performance indicators, or KPIs, are trends in measurable data that you can follow to evaluate how your business is performing. You might choose to track sales from one accounting period to the next, or customer conversion rates before and after a marketing campaign. A KPI definition can include any metric that tracks financial data for the purpose of tracking progress.
The most relevant KPI metrics will depend on the nature of your business as well as your strategies and goals. The best options will show you what is and isn’t working with your business, so that you can stay on track to achieve your goals.
KPI examples for small businesses
There are numerous ways to track performance to find out if your company is on the right track, but some are more relevant for small business owners than others. Here are a few of the most important KPI examples.
As a business owner, you already track revenue to record on the financial statement. However, you can also use sales revenue as a KPI. In this case, it’s more important to examine the trends over time. Are there particular times of the month or year when revenue is down? Are certain employees generating higher revenue than others? Highlighting trends helps you find solutions.
Profit margin is another component of everyday business operation. There are two types of profit margins to consider as KPI examples, including gross profit margin and net profit margin. Gross profit margin refers to the profit earned after you’ve subtracted direct expenses, expressed as a percentage. Ideally, the percentage will trend upward. Net profit margin subtracts both direct and overhead costs, for a tighter margin. If either profit margin is trending downward, it’s time to look at ways to adjust pricing or cut costs.
Customer acquisition cost
Another example of a useful KPI for small business owners is customer acquisition cost (CAC). To calculate CAC, you must divide the costs spent on acquiring new customers by the number of customers acquired. By looking at this metric, you can see if you’re spending too much money on acquiring new clients, and whether or not this strategy is effective.
While the previous examples deal with financial figures, conversion rate is an example of a KPI that looks at success a different way. This refers to the percentage of prospects that are transformed into customers. For example, if you have 1,000 visitors per week to your online shop and 50 of them make purchases, your conversion rate would be 5%. You can track this measure over time to see if your sales and marketing strategy is working.
Quick ratio is one of the most important KPI metrics for small businesses, because it monitors cash flow. This KPI shows if you have enough cash and liquid assets to cover your liabilities. If the quick ratio is less than one, it means you may struggle to pay bills.
Choosing the most relevant KPI metrics
As you can see, there are many different KPIs to choose from. It’s impossible to monitor every single KPI, so you should simply choose the metrics that are most applicable. To begin with, consider your business objectives. Are you more focused on generating sales revenue, or growing your client base? Choose metrics that correlate with your business goals.
Finally, it’s important to set up a logical system to track your KPIs over time. Tools like Google Analytics and cloud accounting software can keep everything organized.
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