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.
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.
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.
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:
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:
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:
Indirect costs:
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:
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
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.
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.
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:
KPIs can be changed, swapped, and developed as businesses grow and objectives shift.
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.
"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.
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.
Take a look at some additional KPIs commonly tracked by small businesses.
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!"
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!