7 May, 2020
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Being able to quantify your business’s performance is essential in our information age. Sure, being able to qualify it with nice words and descriptors is great, but sometimes you just need cold, hard data.
In this guide, we’re going to take a look at how you can use small business KPIs (key performance indicators) to get a better reading on your business’s performance and find ways to improve it.
Key performance indicators (KPIs) are quantitative metrics that businesses of all sizes can use to assess how they’re performing in different areas of operation. Want to see how much engagement you’re getting on social media? There’s a KPI for that. Want to know the drop off rate for your sales funnels? That’s a KPI. Cash flow forecast? Yep. KPI.
Although KPIs are often discussed in the context of performance marketing, they span beyond that and can be used to measure sales and financial performance — and any other kind of performance you can think of really. If you can find a way to quantify it, you can make a KPI for it.
Every year, you go to the doctor for a physical. You’ll show up early in the morning, tired, groggy, and hungry after fasting, so that your doctor can talk with you, run some blood work, and see how your health is doing. The blood tests will give quantitative measurements of how your body is performing, and your doctor will make healthcare decisions based partly on those results.
These blood test results are just like KPIs: they are key indicators of how healthy you are, and how your body is performing. Without going to your physical, it’d be hard to make any sort of treatment plan, and you could easily overlook a serious problem that could come back to bite you.
The same is true for business. It’s deceptively easy to go about your day-to-day blissfully unaware of a problem brewing somewhere in your business’s finances, marketing, or sales. KPIs are like the diagnostic tests your doctor runs, but for your business. But unlike your yearly physical exam, KPIs can be measured however frequently you choose, whether that’s once a day, once a year, or once every 30 seconds, so you can get the data you need, when you need it.
By measuring and keeping up to date on your KPIs, you can better position yourself to make important decisions that are based on hard data. For example, if you’re running several different marketing campaigns, your KPIs can tell you which ones to keep running and which ones to cut short, maximizing your profits and minimizing your losses.
You can make your own KPI for absolutely anything, but here are a few top key performance indicators to get you started.
Profit is a measure of the financial gain your business has made. Revenue is your profit without taking into account any losses. Gross profit is a measure of your business’s financial gain minus the costs of making your products or providing your services.
The formula is:
So, let’s do a quick example. Imagine you run a pizza shop, and you sell an average of 300 pizzas each day, or 9,000 pizzas a month. Each pizza sells for $8, and it costs $3 to make. First, you’ll need to calculate your revenue:
Revenue = 9,000 * $8
Revenue = $72,000
Now, calculate the cost of making all those pizzas:
Cost of Goods Sold = $3 * 9,000
Cost of Goods Sold = $27,000
Now, plug those numbers into the formula:
Gross profit = $72,000 – $27,000
Gross profit = $45,000
This is perhaps the most important metric to keep track of because without making a profit or at least breaking even (where your costs equal your revenue), you’ll quickly go out of business.
Cash flow is just what it sounds like: how much cash is flowing in and out of your business. Good cash flow is essential for all companies, but it’s particularly important for small businesses, which often operate on thin margins.
Without having your cash flow under control, it’s easy to go bankrupt, even if there’s a ton of demand for your product or service. For example, if you send out an invoice on the 30th, and you need that money to pay your office’s rent which is due on the 7th, you can end up in trouble if the client doesn’t pay on time.
Calculating your cash flow forecast can help you plan for the future and make sure you don’t get into a situation like this.
The formula is:
Let’s do an example. Imagine you currently have $10,000 on hand. You’re expecting $60,000 in revenue this month (your inflow), but you also need to pay $30,000 in costs (your outflow). Let’s plug those numbers into the formula:
Cash Flow Forecast = $10,000 + $60,000 – $30,000
Cash Flow Forecast = $40,000
So, by the end of the next month, you can expect to have $40,000 on hand.
The efficiency ratio is sometimes referred to as the cost-to-revenue ratio. In short, it measures how efficiently your business is utilizing its assets to generate revenue.
There is no single efficiency ratio. Instead, there are several different types of efficiency ratios, including:
To calculate one of these efficiency ratios, you generally divide one part by the other. For example, to calculate the working capital turnover, the formula is:
The formula for fixed asset turnover is:
This is easiest to understand when looking at an example. Imagine you have $100,000 in yearly sales revenue, but you spend $50,000 each year to stock inventory. To calculate your inventory turnover, you can use the formula:
Plug in your values, to get:
Inventory Turnover = $100,000 / $50,000
Inventory Turnover = 2
The funnel drop-off rate measures how many visitors exit your sales funnel before making a purchase. In essence, it measures the success of your sales flow.
To calculate it, you can use the following formula:
Let’s do an example. Let’s say you want to measure how many visitors dropped off between the third and fifth conversion step in your funnel. Let’s say you have 25,000 visitors at the starting step (step 3) and 15,000 visitors at the ending step (step 5). Let’s plug those numbers in:
Funnel Drop-off Rate = ((15,000 – 25,000)/(25,000) * 100
Funnel Drop-off Rate = -40
This is an important KPI to keep track of as it can tell you where you’re losing the most leads. For example, if your funnel drop-off rate is -5 for steps 1 to 2, but -40 for steps 3 to 5, you’ll likely want to improve the funnel at those points.
Market share gives you insight into what percentage of sales your company makes in its respective industry. It’s calculated by dividing your business’ sales by the industry as a whole’s sales.
This KPI shows how well your business is competing with other businesses in your sector. If your market share is high, that means you’re competing well.
The formula for market share is:
For example, let’s say that you’re in the very, very niche business of socks with wheels on them. Imagine that there are two companies in this sector, and the total sales between both companies come to $1,000 per year. Your business alone makes $700 of these sales. So, your market share is:
Market Share = ($700 / $1,000) * 100
Market Share = 70%
Nice job! You’re killing it in the socks with wheels biz.
Gross profit margin is a measure of how much profit you make on your sales.
It’s calculated with the formula:
Gross profit margin is important to keep track of because it can indicate how healthy your company is financially as well as how well it’s being managed. Huge swings in gross profit margin can indicate that you aren’t managing your business very well. However, sometimes those swings can be justified.
Let’s do a quick example. Imagine that you have $100,000 in net sales, but your product costs $75,000 to make.
Gross Profit Margin = (($100,000 – $75,000) / $100,000) * 100
Gross Profit Margin = 25%
Your revenue growth rate provides insight into how your business has been growing (or shrinking) over time. If your revenue growth rate is positive, that means that your business has been growing, but if it’s negative, that could spell trouble. The higher the rate, the faster it’s growing.
Revenue growth rate can be calculated over any period of time, be it a week, month, year, or decade. However, month-to-month is one of the more common periods to use.
The formula for revenue growth rate is:
Let’s do an example. Imagine that in May your business made $70,000, and it made $50,000 in June. Plug those numbers in to get:
Revenue Growth Rate = (($50,000 – $70,000) / $70,000) * 100
Revenue Growth Rate = -28.57%
Not doing too well there. If this trend keeps up, that could spell trouble.
The revenue per customer KPI measures how much money each of your customers is contributing to your business’s revenue. This is important to keep track of because it can be a good indicator of your company’s financial security — if one customer makes 100% of your revenue, your business could go under pretty easily. But if each customer makes 0.0001% of your revenue, you’d have to have tens of thousands of people stop using your product to see your revenue drop down to zero.
Revenue per customer can be calculated in dollars and as a percentage.
Here are the formulas:
Let’s do a quick example. Let’s say that your revenue is $100,000 each year, and you have 300 customers. Let’s plug those numbers in:
Revenue Per Customer In Dollars = $100,000 / 300
Revenue Per Customer In Dollars = $333.33
Now, let’s express that as a percentage:
Revenue Per Customer as A Percentage = ($333.33 / $100,000) * 100
Revenue Per Customer as A Percentage = 0.33%
Revenue by product is a KPI that tells you what percentage of your total revenue a specific product or service makes up. This can help you keep track of which products are your best sellers, and which ones aren’t doing so hot.
The formula is:
So, for example, let’s say your revenue is $400,000 a month, and your flagship product makes $100,000 a month in revenue. According to the formula:
Revenue By Product = ($100,000 / $400,000) * 100
Revenue By Product = 25%
So, your flagship product makes up 25% of your entire business’s revenue.
Unlike the other KPIs we’ve included in this list, there is no single metric called “customer satisfaction.” Instead, it’s a group of metrics that measure different aspects of the customer experience.
For example, one of the most popular customer satisfaction KPIs is the CSAT, aka the customer satisfaction score. The CSAT is calculated by asking your customers to rate their satisfaction through a survey and then averaging all the responses.
Customer satisfaction is an important metric to keep track of because if your customers aren’t satisfied, they won’t keep coming back. Sudden drops or downtrends in customer satisfaction are red flags that something needs to be changed.
With these KPIs in hand, you should be well-armed to start quantitatively evaluating your business’s performance. But don’t stop here — there are tons of other KPIs you can use. Plus, you can always invent your own!
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