If your small business is your ship, then your Key Performance Indicators (KPIs) are your navigation tools. Ignore them, and you may find yourself lost in a sea of meaningless data, confusing metrics, and unfounded targets. However, following and measuring the right small business metrics will be your lifeline and drive your ship toward your business goals while at the same time exposing weak spots.
Unfortunately, for many small businesses, choosing the right metrics to focus on can be a challenging task. From profits to social media impact and more, it can be tough to narrow it down and know where to start.
That's why, in today's blog, we're going to look at precisely what KPIs are, how you can determine the right ones for your business, four indicators you should track as a business owner, and some other KPIs you should consider monitoring.
Let's set sail!
What Are KPIs?
KPIs are quantifiable measurements to track and predict a company's performance towards a specific goal.
KPIs often provide an overview of several data points, simplifying and highlighting a particular indicator instead of diving into deep data analysis.
Therefore, KPIs are commonly presented as percentages or simplified ratios and are more concise and represented in reports, charts, spreadsheets, or other visual means.
An example of a KPI for a sales business may be the profit per unit sold of a particular product. KPIs are also frequently used in marketing outcomes, for example, conversion rates of the number of clicks on a specific call to action.
How to Choose the Right KPIs for Your Small Business
Your small business is unique, and because of this, the KPIs you choose to track should be reflected in this. Here are three ways to help you start selecting the right metrics to follow.
1. Work Through Your Business Objectives
Start by thinking about what success would mean for your business at this point, and go from there.
For example, building a more productive team may mean focusing on performance metrics for staff members. In contrast, the desire to increase sales may require a focus on profit and net profit metrics or marketing spending.
This doesn't mean that you can't focus on both. However, simplicity and a "less is more" attitude will serve you well. Having too many KPIs to track defeats the purpose of having KPIs in the first place!
Some starting points when considering business objectives include:
- Increase sales
- Increase visibility
- Improve customer satisfaction
- Build a better company culture
- Source investment
- Organic growth vs. ad performance
- Retain quality staff
- Reduce emissions
KPIs can be changed, swapped, and developed as businesses grow and objectives shift.
2. Consider the State of Your Business
Are you a new brand breaking into the market? If so, your KPIs may differ from Apple's at this point!
Newer businesses will commonly focus on fundamental KPIs to help simplify their processes and get their brand out there. For example, a new company may focus on KPIs such as net profit or customer loyalty (retention). Another focus may be on KPIs related to small business marketing, such as customer acquisition cost (CAC) or clicks. Monitoring metrics for small business marketing strategies is crucial for success!
In contrast, an established business may focus on KPIs relevant to contracting and retaining talent or debt-to-equity ratio as the business grows.
3. Review Both Lagging and Leading Indicators
"Indicators" are measures that show market and business trends.
Lagging and leading indicators are classifications of metrics that can help you model future events and understand changes and correlations from the past.
- A lagging indicator shows the correlation of a metric after an event. For example, the unemployment rate is a classic example of a lagging indicator. For instance, after the 2008 market crash, the unemployment rate rose significantly, showing a correlation between the two.
- In contrast, a leading indicator predicts future events. It can be considered, in many cases, a canary in the coal mine as an early warning system. For example, the rate of company bankruptcies could be a leading indicator of an economic crash.
An excellent way to think of it is that a leading indicator shows predictions, and a lagging indicator confirms trends or a correlation. A successful business will monitor both.
4 Key Performance Indicators You Should Track
So, what specific KPIs should you track for your small business? Whether you're a startup or an established company, monitoring these four indicators can help you reach your goals.
1. Net Profit
"Net profit" refers to the business's income minus the costs, expenses, and taxes. It's the money you hold on to, i.e., "take-home money."
Net profit is easily tracked and calculated with a simple formula of gross profit minus operating expenses and taxes. The net profit helps determine your business's financial state and highlight any areas where costs may be cut.
2. Net Profit Margin
Not to be confused with net profit, net profit margin refers to how much profit is generated as a percentage of revenue.
The figure is expressed as a ratio or percentage. For example, a net profit margin will show how much profit the company gains for every dollar in revenue.
It is a crucial indicator of profitability.
A high-profit margin (number) will show that a company can minimize expenses and manage the business effectively. As a result, it may be one of the first KPIs investors ask for when considering an investment.
3. Customer Acquisition Cost
Customer Acquisition Cost (or CAC, as the cool kids say) is the cost of acquiring a new customer for your business. It's expressed as a sales and marketing expense divided by the number of new customers.
Sales and marketing expenses could include everything from the salaries of your marketing team to the cost of pay-per-click advertising on social media channels.
4. Lifetime Value of a Customer
A customer's lifetime value indicates a customer's value to your business over the entire relationship period. Acquiring new customers is substantially more costly than nurturing current customers and applying customer retention strategies. Because of this, CLV is a valuable indicator for a small business owner.
Other KPIs to Consider Tracking
Take a look at some additional KPIs commonly tracked by small businesses.
- Conversion rate
- Gross profit margin
- Monthly recurring revenue
- Days sales outstanding (DSO)
- Website Traffic
- Social Media Engagement
- Employee retention rate
Finally, set up your KPI for small business tracking, utilize tools to track, and set a time to review each KPI to stay on top of it all.
Measuring Small Business Metrics Will Take Your Business Further!
Your KPIs are like a health check on your business. Doing them regularly and knowing where to look can keep your small business in tip-top shape.
Tracking key metrics is not only recommended but fundamental to the success of your small business. If you're unclear on which metrics you should be following or how to get the most out of your data, then it's time to let the experts take a look.
If you're ready to turn your KPIs into ambitious but manageable goals, undertake an analysis of your business, and take things to the next level, reach out to a Geek today!
Learn more about optimizing your business with our free resource, the "Gameplan for Business Success!"