4 Small Business KPIs: Grow Your Business With These Key Metrics

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 company 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 small business KPIs you should consider monitoring. 

What Are Small Business 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. 

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, also known as net income or the bottom line, is the amount of money a business retains after accounting for all expenses and costs. It represents the true profit earned by the business during a specific accounting period, typically a quarter or a year.

The basic formula for calculating net profit is:

Net profit = Revenue - Total Expenses

Here's a breakdown of the components:

Revenue: This is the total income generated by the business from its sales or services.

Total Expenses: This includes all costs incurred by the business to operate, including:

• Cost of goods sold (COGS): The direct costs associated with producing the goods or services sold, such as materials, labor, and manufacturing overhead.
• Operating expenses: The ongoing expenses of running the business, such as rent, salaries, utilities, marketing, and administrative costs.
• Interest expense: The cost of borrowing money, such as interest on loans.
• Taxes: The amount of taxes the business is required to pay, such as income taxes and property taxes.
  
  

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.

Net profit margin expresses the percentage of profit a company generates from its total revenue. It's calculated as:

Net Profit Margin = Net Profit / Revenue x 100%

Think of it this way, for every dollar of revenue earned, how many cents translate to actual profit after all expenses and taxes are accounted for?

The beauty of the net profit margin lies in its ability to compare profitability across companies and even industries. It transcends the absolute dollar amounts of profit, allowing for apples-to-apples comparisons regardless of a company's size or revenue scale.

While a high-profit margin certainly indicates your ability to minimize expenses and manage your business effectively, its true significance goes beyond simple numbers. Investors understand its power as a key performance indicator because it speaks volumes about your company's:

• Operational Efficiency: A high margin signifies you've mastered extracting maximum value from your resources. You're minimizing waste, negotiating effectively with suppliers, and keeping tight control over operational costs.
• Pricing Power: It reflects your ability to command premium prices for your products or services. This could stem from a unique value proposition, strong brand recognition, or efficient marketing strategies.
  
• Competitive Advantage: In a crowded market, a high margin suggests you've carved out a niche with sustainable profitability, separating yourself from competitors who might struggle with lower margins.
  
• Future Growth Potential: Investors see high margins as a strong indicator of future profitability. It suggests you have a clear understanding of your costs and pricing, which are crucial for scaling your business effectively.

3. Customer Acquisition Cost

Customer Acquisition Cost or CAC, 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.

The core formula for CAC is straightforward: Sales and marketing Expenses / Number of New Customers. But the true picture lies in what constitutes those expenses. It's not just salaries and social media ads. Consider this expansive list:

Direct costs:

• Salaries, commissions, and benefits of marketing and sales staff
• Cost of creative assets like website design, ad copy, and video production
• Paid advertising spend across various channels (social media, search engines, display ads)
• Content marketing expenses (blogging, social media management)
• Affiliate marketing commissions
• Trade show participation and event costs

Indirect costs:

• Marketing technology subscriptions (CRM, email marketing software)
• Agency fees for marketing services
• Public relations activities
• Customer acquisition training for sales teams

4. Lifetime Value of a Customer

Customer Lifetime Value (CLV), often referred to as lifetime customer value, goes beyond a single transaction. It paints a broader picture, revealing the total net profit you can expect from a single customer throughout their entire relationship with your business.

This value encompasses not just their initial purchase, but also repeat purchases, upsells, referrals, and the overall duration of their loyalty.

Here's why CLV is critical for small business owners:

• Acquisition costs bite: The harsh reality is, that attracting new customers can be significantly more expensive than nurturing existing ones. Marketing campaigns, discounts, and promotions all eat into your budget. By focusing on CLV, you shift your mindset from constantly chasing new buyers to maximizing the value of the customers you already have.
  
• Loyalty breeds value: Imagine a customer who not only loves your products but becomes a brand advocate. They buy regularly, try new offerings, and sing your praises to their friends and family. Such a customer embodies a high CLV. By prioritizing customer satisfaction and building loyalty through excellent service, engaging experiences, and personalized offers, you cultivate these valuable relationships.
  
• CLV guides your strategy: Knowing your CLV empowers you to make informed decisions. You can:
  
  • Segment your customers: Identify high-value segments and tailor marketing efforts accordingly.
  • Optimize pricing: Craft strategies that encourage repeat purchases without sacrificing profitability.
  • Evaluate marketing budgets: Allocate resources based on customer segments with the highest potential CLV.
  • Design loyalty programs: Reward repeat customers and incentivize word-of-mouth marketing.

In a nutshell, focusing on CLV is a smart investment for your small business. It helps you:

• Reduce costly customer acquisition expenses

• Boost profit margins through repeat business

• Build a loyal customer base that advocates for your brand

• Make data-driven decisions for long-term growth

Additional Examples of Small Business KPIs

Exploring key performance indicators (KPIs) across different small business areas like Sales Revenue, and Marketing, it's clear these metrics are vital for understanding and improving performance.

1. Sales and Revenue

• • 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 sales to track metrics like the Sales Conversion Rate, which measures the percentage of leads that result in a sale.

2. Marketing

• • A KPI in marketing outcomes, for example, could be the conversion rates of the number of clicks on a specific call to action (CTA).
  • Another example could be the Cost per Lead (CPL), which measures the cost of acquiring a lead through marketing efforts.

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.

Additional Small Business 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. 

Learn more about optimizing your business with our free resource, the "Gameplan for Business Success!"

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!