Learn How KPIs Can Help Measure Your Small Business Success
You’ve set your small business goals and are working hard toward success. Your monthly Profit and Loss Statement will tell you if you’re making money. How do you know if you are making the right decisions to reach your goals?
The best way to measure progress toward your goals is to track the right Key Performance Indicators (KPIs). Keeping track of the most relevant KPIs for your business is the easiest way to measure your progress quickly. The correct KPIs will help you gauge your progress without diving too deeply into details.
KPIs can also highlight areas in your business that need improvement. It’s important to know what is and isn’t working for you as quickly as possible. The sooner you see a strategy isn’t working, the sooner you can change course quickly.
What are the Right KPI’s for Your Business?
There is no “One Size Fits All” when choosing the right KPIs for your business. The KPIs you choose will depend on three things specific to your small business.
The industry in which you operate. The typical KPIs can vary significantly among different business sectors. Retail businesses, professional services, and manufacturers all will have industry-specific KPIs that are typically used. Do some research to see what is commonly used for your industry to determine if those KPIs are a good fit for your goals.
Where you are in your business cycle. Are you a start-up, in a growth stage, or a maturing business? New businesses focus on revenue growth and the right marketing strategy. Established companies will often look for more efficient ways to increase revenues, cut costs or diversify. A mature business may be looking for the best way to sell or merge with another company. Each cycle will require different metrics to track performance levels.
The long-term goals you have set for your business. Your long-term goals will be unique to your small business. Choose KPIs that will help you track what is important to you. You will have varied goals associated with your customers, marketing, operations, and employees. What KPIs will work to provide the insight you need for those goals?
What are the Traits of a Good KPI?
As a small business owner, you can design your own KPIs. In order for them to be helpful, there are three characteristics they should have.
Measurable and Actionable. KPIs must clearly and specifically point out where your business goals are focused. Don’t be too general with your goals. Focus on the exact steps needed to accomplish your goal. Your goal could be to increase revenue by $10,000. What do you need to do to achieve that? How many additional clients will that require, or how many additional units will you have to sell? Will it take two, three, or six months for the new revenues to materialize? Decide the best way to measure your progress accurately based on the steps taken to achieve your goals.
Timely. Should you use forward-looking data (leading indicators) to judge your progress, or will you need historical data? An excellent example of a leading indicator is customer satisfaction. Knowing you have happy customers typically means you can continue to expect strong revenues. A lagging indicator example would be last month’s profit. Prior period profit is good to compare against your budget and the current period to show if you have made progress.
Influences the Bottom Line. It doesn’t matter whether your long-term goal is to increase profit margins or improve customer satisfaction; all KPIs should positively impact your bottom line.
What KPI’s Should You Always Track?
A few KPIs help measure the health of almost any type of business. These three KPIs are a good starting point to see how well you are doing against your goals.
Net Profit. This is a quick and easy metric to begin using. It is simply looking at your revenues less your expenses over a specific time frame. Compare your net profit monthly and annually to see the trends in your business. You probably won’t always see an increase in profit. Looking at your profit over different periods can help you identify recurring trends. Knowing what trends to expect can help you plan to increase revenues during slower times or cut back on costs.
Net Profit Margin.
Use this metric to determine how well your business utilizes its revenue. The net profit margin will show you what percentage of your revenue you have left over after expenses. Take the net profit calculated above and divide it by your revenue number.
For example, if you had $10,000 in revenue last month and your net profit was $5,000, your profit margin would be 50%. So for every dollar you earned the previous month, your business kept $.50. Reviewing your profit margin over a period of time will point out if you are increasing revenues and profits at a similar rate. If your profit margin grows less than your revenues, you may need to review why costs have increased.
Quick Ratio. The quick ratio calculation is essential for any business to measure regularly. This metric will point out if your company has a healthy cash flow. Lack of cash flow is typically the number one cause of small business failure.
The purpose of the quick ratio is to show you whether all your current assets are enough to pay for all your current liabilities. This is calculated by adding your cash, marketable securities, and accounts receivable, then dividing that number by the total of your accounts payable and the current amounts due for any loans.
If you have $10,000 total in cash and accounts receivable and $7,700 total in accounts payable and other current liabilities, you would have a quick ratio of 1.3. A quick ratio of at least one or higher tells you you have enough cash to cover your debts. Having a quick ratio lower than one could mean it will be hard for you to cover the money you currently owe. The sooner you know your quick ratio, the faster you can make plans to improve your cash position.
Start Tracking Your KPI’s Today
Do some research or speak with your accountant to see which KPIs are commonly used in businesses similar to yours.
Don’t wait any longer to determine what other KPIs you should use to measure your business goals. Not sure where to start? Contact me today, and let’s start working towards your success together!