You can improve your business by measuring your business activities. In an increasingly competitive marketplace, it’s important to have measurable performance indicators to evaluate the profitability and success of your business. Businesses both large and small incorporate the use of key performance indicators, known as KPIs, and other metrics for reviewing and improving their business.
Understanding Sales Metrics and KPIs
Sales metrics are simply any data you use to measure sales performance, such as the average purchase amount per customer. Sales metrics are used in a variety of ways to measure how effectively sales goals are being met or how profitable the business is or to identify potential problems or improvement areas.
KPIs are distinguished from other metrics by being “key” sales measures that are related to major priorities or goals of your business. For example, if a major goal of your business is to capture at least 20 percent of the available market share, you might use KPIs such as “number of new customers” or “customers who switched from buying from a competitor.”
Your choice of sales metrics or KPIs depends on the specific nature of your business, but there are some metrics virtually any business can benefit from using.
Revenue by Product or Product Line
Tracking your company’s revenue by product or product line can be a very helpful sales metric for maximizing profitability.
Nearly all businesses market more than one product, and different products mean varying levels of sales and profit margins. By tracking and analyzing your sales revenues, you can easily identify which of your products are generating the most revenue or highest profits. With that information, you can focus your sales efforts on your most profitable products or choose to give attention to finding ways to increase sales of slower-moving products.
Cost of Selling as a Percentage of Revenue
Determining your cost of selling is one KPI that can help you evaluate how efficiently your sales force operates.
The cost of selling includes all the expenses of your business directly related to sales, such as salaries and bonuses, and also all work-related expenses of your sales staff.
The cost of selling metric reveals what level of expenses is required for your business to attain a given amount of revenue. You can examine this metric in a number of ways, including whether your cost of selling as a percentage of revenue is increasing or decreasing, which gives you an idea of how efficiently your business is generating sales revenue. It’s also helpful to look at how your cost of selling metric compares to that of competitors or similar companies in your industry.
Action metrics are KPIs you can use to measure and evaluate the performance of your sales personnel. Action metrics can track any sales-related actions your sales staff may be regularly performing. Examples of action metrics include such things as “number of contacts with potential new customers” and “number of follow-up emails sent.”
Examining action metrics enables you to measure the productivity of your salespeople clearly. It also can help you identify which actions your salespeople engage in are most effective in generating new business or increasing revenue from existing customers.
Obviously, one of the most important bottom-line metrics for evaluating your company is that of your total, or net, profit or loss. You can create profit and loss statements easily with Quickbooks accounting software anytime you wish, enabling you to examine profitability over any time frame. In addition to revealing your basic profit/loss position, a profit and loss statement can be used to review expenses by category, provide detailed transaction lists, and identify areas where your business has either exceeded or under-spent according to your budget.
By carefully selecting and using KPIs and other sales metrics, you can guide your company toward achieving maximum efficiency and profitability.