Mastering your metrics: Why KPIs matter
It’s difficult (if not impossible) for business owners to set growth goals when they don’t have a clear picture of the business’s current financial health. This is where key performance indicators (KPIs) play a major role.
KPIs serve as measurable indicators of a business’s successes and failures. A few examples of common KPIs for small businesses include net profit, net profit margin, cash flow, customer lifetime value and conversion rate. When the right KPIs are monitored on a regular basis, it provides an overview of how the business is performing at any given time.
This level of insight better enables owners to proactively correct issues and adjust goals and objectives as needed throughout the year. Overall, KPIs can help keep your business on track and uncover initiatives and areas of operation where your efforts are paying off (or not).
Mastering key metrics…
To help you master the metrics that matter for your business, the following offers details on five common KPIs to track:
To start out with a simple KPI, commit to tracking your net profit over time. Analyze the data to find out if your company is showing more or less profit year to year. Net profit is calculated as follows: Revenue - Expenses.
Be clear that your net profit will not continuously go up. Keep in mind the times when you’ve reinvested in the business, experienced seasonal sale slumps and/or turbulence in the economy. Overall, the goal is to track profit and help identify if you’re earning more than you spend.
Net profit margin
Net profit margin measures the profitability of your business and is also an indicator of how well revenue is being used. It’s a measure of how much profit your business makes from the revenue it earns. The formula to calculate net profit margin is: Net Profit / Revenue.
To further clarify, consider the following example: Your business has $200,000 in revenue during the year and a net profit of $50,000, making your profit margin 25 percent. That means for every dollar earned, the business keeps $0.25. Comparing net profit margin year over year helps you see if an increase in revenue increases profit at the same rate.
Cash is the lifeblood of any enterprise. Maintaining a healthy cash flow ensures that a business can pay common expenses such as salaries, utilities and taxes while also having funds to put toward growth and business expansion. As a result, tracking this common KPI is critical to business success because it allows you to better plan for large expenditures, keep spending in check, and offer lenders a clear picture of the business’s financial health should you need to apply for a loan. (Read more on cash flow management in the “Cash is king” article published in our November-December 2020 issue of the magazine.)
Customer lifetime value
This KPI answers the question of how much a customer is worth. It’s an important metric to monitor because it helps guide you on properly allocating funds to areas like sales and marketing. For example, if you know that an average customer is worth $500, you’ll want to ensure that the cost to acquire the customer is well below that.
For companies that work with customers on a retainer model, this is a much easier KPI to track. For those who work with clients on a per-project or per-purchase basis, it can be tricky to track this KPI properly. This is where seeking the advice of an accounting professional can help.
This common metric measures the number of prospects who actually convert to customers. There are many ways to measure conversion rate, depending on your business model. Here are a few examples:
Online store—Measure conversion rate by identifying all customers who made a purchase in the last 30 days compared to the number of visitors to your online store. If you had 400 purchases and 10,000 unique visitors in a month, your conversion rate would be 4 percent.
Agency—If the business pitches to 10 prospects within 30 days and converts three to clients, the conversion rate is 30 percent.
Tracking this metric over time helps uncover potential issues in your sales and marketing efforts that could be hindering client conversions.
These are just a few examples of KPIs, which can be adjusted by your specific business needs or by industry. When you master the metrics that matter, you set your business up to grow and thrive. To learn more about the KPIs important to your organization, contact our firm today.Back to issue