As a small business owner, you might think that when you’re attending to customers or clients and your products are moving off the shelves — or your services are selling — everything’s going well. In spite of customer traffic and sales, however, it’s crucial to measure the health of your business.
Just as doctors use certain indicators to determine a patient’s health, you can use certain key performance indicators, or KPIs, to get a sense of how well your business is doing. Among the top KPIs to pay attention to are your cash flow forecast, indicators related to your sales funnel, and your inventory turnover rate, all of which can help you with planning as well as assessment.
Cash Flow Forecast
Good cash flow management helps your business run smoothly. Cash flow forecast is a key performance indicator that shows your likely cash flow in the coming weeks or months, or the amount of money you expect to come in and flow out of your business, including expenses and income.
Prepare your cash flow forecasts by first estimating your sales for a specified time period. You can use previous sales over the same period if you have a seasoned business. New businesses might take things like industry trends, customer surveys, and supplier feedback into consideration to estimate sales. Next, take payment timing into account — the shorter your invoicing period, the better. Then add up your expenses.
To project your cash flow, start with your total cash balance, or what you have in the bank. Next, add in your projected revenue, and subtract your projected expenses. Knowing your cash flow helps you make adjustments to keep your business operational and can even help you gain business loan approval.
Sales Funnel Drop-Off Rate
A sales funnel represents all the steps you take your prospective customers through to get them to buy from you. To visualize the process, imagine all your customers in a big funnel. The greatest number of prospects are in the widest part. As they make their way through the skinny part, completing certain steps, they convert into buyers.
Do you see any prospects in the wide part of the funnel walking away? If so, you need to know why. To figure out your sales funnel drop-off rate, subtract the number of prospects at a particular step where you’re losing customers from the total number of prospects at the widest part of the funnel. Take the new value, and divide it by the number of customers you had at the widest part.
This key performance indicator helps you locate problems along your sales funnel and make adjustments to get customers to complete sales. For example, knowing your sales funnel drop-off rate might reveal problems with a shopping cart that’s not configured correctly or a form with unclear instructions.
Inventory Turnover Rate
Do you know your inventory numbers? Do you know how fast certain items are selling and whether you’re making a profit? Inventory turnover rate is the key performance indicator that helps you gain this knowledge. To find this figure, add up the cost of sold inventory, and divide the sum by the value of your remaining inventory.
This indicator shows whether or not you’ve made a profit. As a business owner, you want inventory to move, but not at a rate that decreases your profit margin. Your inventory turnover rate helps you see where to make adjustments in inventory quantities and pricing strategy.
Using key performance indicators can help you steer your new company to success even as you navigate those challenging first years in business.