You probably know that to help your business grow and thrive, it’s important to monitor different key aspects of your business. But when you’re a small business owner there are a lot of details. Sitting down to look at important metrics can fall off your priority list.
That’s where key performance indicators (KPIs) come in. They help you measure and improve your business without getting overwhelmed with details and data.
KPIs are measurable values that show the health of your business and your progress towards goals. Watching KPIs can keep your business on track and let you know whether your efforts are paying off.
KPIs will also help you determine where things aren’t working in your business, so you can hopefully course-correct before it becomes an issue.
There’s not a complete list of KPIs that every business should track. What you should track depends on your industry, business stage and goals.
However, there are a handful of KPIs that every business would benefit from tracking. Even more, there’s a long list of others that could be beneficial based on the type of business you have.
You can’t track every KPI for small business out there. Not only would that be difficult to do, but you’ll also lose sight of what’s really important. There are three things you should consider when choosing your KPIs.
Business owners are often focused on the bottom line. While it’s important to know whether a business is getting more or less profitable year after year, that’s not the only thing a good business owner needs to track.
Good KPIs will help you measure what’s important to your business. Think about the different goals you have for your business. You might have goals related to your customers or clients, your employees, your operations and your marketing. What are the metrics that are most important related to those goals?
For example, customer satisfaction and lifetime value of a customer might be really important for some businesses. Other businesses’ success may hinge on employee productivity or how quickly they sell through their inventory. Choosing KPIs based on your business objectives will make them more valuable.
Different KPIs are going to be more important at different business stages. A relatively new company that is trying to stabilize cash flow might put a bigger emphasis on the days sales outstanding (DSO) metric. For the reason that it tells them how quickly they can turn a receivable into cash.
A more established company might care less about DSO. Instead, they may want to focus more on employee retention to help them grow the business. Try to focus on KPIs that are most relevant to your stage of business.
The best mix of KPIs is to pick both lagging and leading indicators. A leading indicator is forward-looking and can influence results. In contrast, a lagging indicator is backward-looking and will tell you what results have happened.
For example, customer satisfaction is a leading indicator. The happier your customers are with your product or service, the more likely they are to return. That’s a leading indicator that your business sales will continue to be healthy.
An example of a lagging indicator is profit. That metric will show you exactly how your business performed. However, it doesn’t give you an indication of how your business will perform in the future.
There are a handful of KPIs that are beneficial for almost every business to track. These are core KPIs that can help monitor the health of a business. They are likely not the only KPIs you’ll want to track (more on extra KPIs you’ll want to consider below) but are a good place to start.
A simple and easy place to start with a KPI for small business is to track your net profit over time. Is your company getting more or less profitable year to year?
net profit = revenue – expenses
You won’t always expect that your net profit goes up. Sometimes you’ll see a dip in profits when you invest in the business or during difficult times in the economy. But keeping an eye on profit will help you see whether your business earns more than it spends. Certainly, that’s an important metric to know.
Your profit margin, also known as your net profit margin, is used to measure how profitable your business is. Similar to the net profit metric, it will show you how well your revenue is being used. It’s a measure of how much profit your business makes from the revenue it earns.
net profit margin = net profit ÷ revenue
If your business has $100,000 in revenue during the year and a net profit of $40,000, your profit margin is 40%.
That means that for every $1 that you earn, your business keeps $0.40. Comparing your profit margin from year to year will help you see if an increase in revenue increases profit at the same rate.
Cash flow is an important thing for businesses to monitor. It’s often cited as one of the main reasons that small businesses fail.
The quick ratio is a KPI that makes it easy to see whether your cash, securities, and the money you expect to have soon (your accounts receivable) are enough to cover your liabilities. The calculation is:
quick ratio = (cash + marketable securities + accounts receivable) ÷ current liabilities
For example, if you have $10,000 in cash, $5,000 in accounts receivable and $12,000 in current liabilities, your calculation is ($10,000 + $5,000) ÷ $12,000 = 1.25
If your quick ratio is 1 or higher, that means you have enough cash and liquid assets (assets that you can quickly sell to get cash) to cover outstanding bills. A quick ratio of less than 1 means that it may be more challenging to cover your current liabilities.
Do you know how much it costs to get a new customer (or a client) for your business? In the early stages of your business, you might not worry about how much it costs to get a sale. But as your business grows, this is an important metric to keep track of.
You can do this by measuring your customer acquisition cost. Or how much you have to spend to get one customer. This is the equation you’d use:
customer acquisition cost = (sales expenses + marketing expenses) ÷ number of new customers
So, if you spent $5,000 on marketing costs during a quarter and you got 10 new clients, your customer (or client) acquisition cost is $500 per client.
How much is a customer worth? This is an important metric to know because it can help you decide how much you can spend on sales and marketing costs. If you know that your average customer spends $100 with you, you’ll want to ensure that your costs to acquire that customer are well below that.
This isn’t as straightforward to measure as some other KPIs. As a result, some businesses will have an easier time measuring it than others.
If your business works with clients on a retainer model, that is relatively easy to measure:
lifetime value of client = average retainer price x average number of months a client works with you
If you work with clients on a project basis, you’ll need to do a little more research. Estimating the average number of projects you do with a client and the average cost of each project will enable you to measure the average lifetime value of a customer:
lifetime value of client = average number of projects with client x average cost of each project
The KPIs above aren’t the only ones you’ll want to track. Depending on your business type and stage there are other KPIs that can give you an accurate measure of how your business is performing. Some of those KPIs include:
This basic metric measures how many prospects actually become customers. You can measure conversion rate in a number of different ways, depending on the type of business you run.
For an online store, you could measure this by looking at the number of people who made a purchase last month compared to the number of people who visited your online store. Let’s you have 400 purchases and 10,000 unique visitors in a month. Your conversion rate would be 4%.
If an agency pitches 10 potential clients in a month and lands two of the projects, their conversion rate is 20%.
Tracking your conversion rate over time will help you to see whether changes you make in your sales and marketing are improving your conversion rate.
If your business sells products, one KPI for small business you should measure is your gross margin ratio. Your gross margin will tell you how much money is remaining after paying for the product that you sold. You can measure gross margin ratio by product or in total for your business.
Let’s say you sell $10,000 worth of product in a month and the cost of goods sold was $4,000. The gross margin as a percentage is 60%. It’s calculated by dividing your gross margin (sales of $10,000 minus the cost of goods sold of $4,000) by the total sales.
If you want to calculate it per product, in order to know what products are the most profitable for you to sell, you’ll do the same calculation per item. Say you sell shirts and a customer buys one shirt for $20. If the cost of that shirt to you is $8, your gross margin ratio on that shirt is 60%. ($20 – $8) ÷ 20 = 60%
The higher your gross margin is, the more money you have remaining to pay for other business expenses like salaries, rent and marketing.
Some service-based businesses may have clients on retainer, giving them monthly recurring revenue. If you have two recurring client contracts, each for $1,000 per month, your monthly recurring revenue is $2,000 per month.
This can help with planning. As a result, you’ll know approximately what is almost guaranteed to be your minimum revenue for the month.
How efficient is your business when it comes to getting paid? This is important for any business. But especially for newer businesses or those that are working to stabilize their cash flow.
DSO measures how long a receivable is outstanding. That is, how long on average it takes for your company to get paid once a sale has been made.
You can calculate DSO by dividing the accounts receivable balance by total sales and multiplying it by the number of days in a period.
For example, say that during January you had $50,000 in credit sales (sales where the customer didn’t pay immediately). If you have a $30,000 accounts receivable balance, with 31 days in the month your DSO is 18.6.
When your DSO increases or gets too high, that can be a sign that it’s time to focus on improving your receivables process.
If you run an online business, one of your key metrics is knowing how much traffic your website receives. There’s no calculation involved here. Instead, you’ll use a program like Google Analytics to help you track traffic trends over time.
Monitoring your traffic can help you understand when and why you see spikes and dips in traffic, and better understand your visitors. If you run an ad campaign, does that lead to a spike in traffic? If you have a sale, does that lead to a bigger spike in traffic? Is your traffic growing over time (a good sign) or is it slowly decreasing?
If your business relies on social media to generate business, social media engagement is a great KPI to track. Measuring likes, comments and shares will help you see what type of posts contribute to boosting your business.
Like with website traffic, no complex calculations are needed here. Watching and monitoring trends over time will help you focus your efforts. Consequently, you’ll be able to concentrate on creating the right posts and content that drive business growth.
Your clients are the key to your business success. Clients and customers who like your business and enjoy working with you will become repeat customers or recommend you to others.
How do you know if you’re meeting your client and customer needs? Measuring customer satisfaction can be a great indicator of how you’re doing and what you can expect for the future of your business.
One way to measure customer satisfaction is through administering a survey. Have customers rate their satisfaction on a numerical scale from great to bad. Tracking scores over time can help you see whether your customers are happy with your product or service (and getting happier). Or whether there’s a problem that you need to fix.
Another customer-focused metric is the net promoter score. This score measures how loyal your customers and clients are. If this score sounds complicated, don’t worry, it’s not.
The score is measured with one question. Respondents are asked, “How likely are you to recommend our company to friends or colleagues?” They then rate their answer on a scale from zero to ten. Zero means they are extremely unlikely to and ten means they are very likely to.
While this seems simple, there’s a reason it’s so effective. Your current customers and clients are the cheapest, and best way you can get new customers and clients. It’s a helpful signal to know whether your business is poised to grow organically. Or whether there are some service issues that you should address.
Hiring and training employees is a major expense. The longer a good employee stays with your company, the better the return on investment you’ll get from the money and time you spent hiring and training.
That’s why as your company grows, a focus of your KPIs should be on retaining the best employees. One KPI to help you measure this is the employee retention rate.
To calculate this, let’s say you started the year with 20 employees. By the end of the year, 16 of those employees are still working at your company. Your retention rate is 80%. That’s the number of employees retained (16) ÷ the number of employees at the beginning of the year (20) multiplied by 100 to get a percentage.
A decreasing employee retention rate is an indication that there’s something that can be improved, like employee satisfaction.
Once you’ve picked the right KPIs to track for your business, you’ll want to set up your KPI tracking the right way.
As a business owner, you have a lot to keep track of. Adding multiple KPIs to your list of things to monitor—without creating an easy way to do so—is setting you up for a lot of frustration.
Luckily, there are a number of tools that can help you get the data you need to track KPIs. That way, you’re spending less time working in spreadsheets and more time working on our business.
It’s important to ensure that everyone leading your business is aligned on the KPIs to monitor and agree that they are important. Depending on each person’s role, they may have different priorities. For example, someone running finance will be focused on financial metrics. A marketing specialist will care more about marketing metrics.
Regardless of the area of business they are in, each leader should agree on the right KPIs for the business overall. Likewise, they should commit to monitoring and improving them.
Whether you’re going to review your KPIs monthly or quarterly, set a time in advance and stick to it. While there will always be more urgent needs, carving out time to review the health of your business and make proactive changes is critically important.
Tracking KPIs is vital to the health of your business. But it doesn’t need to be a burdensome task. Picking the right KPIs and utilizing tools to monitor them can help you make informed decisions to grow your business.
This post was updated in April 2020.