In order to ensure your company is consistently progressing, it’s important to quantify your business’ performance with hard data. Key performance indicators (KPIs) help you assess your business’ results and build strategies for achieving your goals.
What are KPIs?
Key performance indicators (KPIs) are a set of quantifiable measurements used to gauge a company’s overall long-term performance. They demonstrate how effectively a company is achieving key business objectives and help determine a company’s strategic, financial, and operational programs. KPIs can be financial, including cash flow forecasts, gross profit margins, revenue growth rates and relative market shares. They can also be anecdotal, measuring foot traffic in a store, employee retention, repeat customers and quality of customer experience. KPIs help keep a small business on track.
Criteria for KPIs:
The goals of each firm are unique. Therefore your company must craft their own KPIs. However, all KPIs should meet the following criteria:
- Actionable: Your KPIs should concretely and objectively show you the improvements that you need to make to help your business.
- Accurate: The best KPIs are well-defined, quantifiable measurements that are easy to calculate and interpret.
- Timely: Using old data won’t give you a measure of what’s going on currently. It‘s only useful if you use it as a comparison tool for current data.
- Impact the bottom line: Whether your goal is to improve net profit margins or customer satisfaction and retention, an improvement in your KPIs should result in progress toward your goal.
How to choose the right KPIs for your small business:
There is no definitive list of KPIs that all businesses should track. What you measure depends upon your industry, stage of business growth and company goals. However, there are some things you should consider when choosing your KPIs.
- Your business objectives: Good KPIs help you measure what’s important to your business. What are your company’s goals related to your customers or clients, your employees, your operations and your marketing? Choosing KPIs based on your business objectives makes them more valuable.
- Your business stage: A new company might focus on customer acquisition cost and user activation rate. Established companies may focus on employee retention to help them grow the business. Focus on KPIs that are most relevant to your stage of business.
- Lagging and leading indicators: A leading indicator is forward-looking and can influence results. A lagging indicator is backward-looking and will tell you what results have happened. For example, customer satisfaction is a leading indicator while profit is a lagging indicator. Both are necessary barometers of how your business is and will perform.
KPIs most every business should track:
There are a few key performance indicators that are advantageous for almost every business to track. Though they are not the only KPIs that your company should track, they’re a good place to start.
- Sales revenue refers to the income from all customer purchases and is the first KPI most companies evaluate to gauge success and market demand.
- Cash flow forecast: Flow in and out helps business owners assess whether their sales and margins are appropriate and estimate payment timing and likely costs. It also helps in tax preparation, new purchases, or identifying any cash surpluses. This is one of the most critical KPIs for small companies to track.
- Net profit and net profit margin: Net profit equals your revenue minus expenses. Keeping track of this KPI lets you know whether your business earns more than it spends. Your net profit margin is used to measure how profitable your business is and is a stronger indicator of your company’s financial health.
- Gross profit margin is an analytical metric expressed as a company’s net sales minus the cost of goods sold. It shows the amount of profit made before deducting selling, general, and administrative costs. The benefit of tracking this KPI over time is that you can easily quantify how much money you’re keeping against the amount paid out to suppliers.
- Monthly recurring revenue (MMR): If your firms’ focus is on retaining customers and preventing churn, then this KPI is important. You’ll want to measure new MRR (new customers), expansion MRR (customer who upgraded their plan) and churn MRR (revenue lost from customers cancelling before their expected average customer lifespan).
- Customer acquisition cost is a measure of how much you have to spend to get one new customer. This KPI helps to determine how costly, and ultimately how profitable, growth is for your company.
Tracking KPIs is vital to the health of your business. The most successful businesses use KPIs to help them measure outcomes. Picking the right KPIs and utilizing tools to monitor them can help you make informed decisions to grow your business. Small business owners should incorporate key performance indicators in their business strategy to help evaluate progress and set goals. Keep your company on track with KPIs!
Need advice and help to grow your company through the use of key performance indicators? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.