It’s great to be able to measure solid profits for your small business. The fact is, however, that profits are only one of the many factors affecting your company’s balance sheet. Key performance indicators (KPI) refer to the values used to assess a business’ success in reaching its goals. In the long run, tracking relevant KPIs can help you make important decisions about your company’s growth and development.
Here are seven of the most important KPIs to track as a small business owner.
1. Cash Flow Forecast
Cash flow forecasts let businesses assess whether their sales and margins are appropriate, and are consequently one of the most important KPIs for small businesses to track. To make your cash flow forecast, add the total cash your business has in savings to the projected cash value for the next four weeks, then subtract the projected cash out for the next four weeks.
Savvy business owners perform regular cash flow forecasts so they can identify problems in the early stages and make any necessary adjustments. Along with helping businesses anticipate upcoming surpluses or shortages, a cash flow forecast is crucial for tax planning and upcoming loan applications.
2. Gross Profit Margin as a Percentage of Sales
No business can achieve success if it’s paying out more to suppliers than it’s netting in sales each month from customers. Gross profit margin as a percentage of sales is an expression of total profits as they compare to revenue.
First, find your business’ gross profit margin (GPM) by dividing your gross profit amount by your sales. Take that, multiply it by 100, and you will have your gross profit margin as a percentage. Next, to find out how much of your GPM makes up your overall sales, divide that value by your sales amount. Here’s an equation for easier reference.
(Gross Profit/Sales x 100) / Sales
The benefit of tracking this KPI over time is that you can easily quantify how much money you’re keeping against the amount paid out to suppliers. As businesses retain more money, gross profit margin increases. But a decrease in gross margin as a percentage of sales could indicate that a business is overspending on its supplies. Owners would need to reduce overhead costs or increase prices on goods and services to compensate.
3. Funnel Drop-Off Rate
Your funnel drop-off rate assesses the number of visitors who abandon a conversion process—or sales funnel—prior to completion.
For the uninitiated, imagine a sales funnel as an actual funnel pointed downward. The top of the funnel is the widest part of it, and represents the entry point for a customer to first get acquainted with your company or product. There are conversion steps along the way, progressing from the top of the funnel to the very bottom of the funnel, where the customer exits—or is “converted”—into a sale. With this in mind, the funnel drop-off rate is the number of customers that leave the funnel prior to buying something.
To calculate funnel drop-off, start by finding the number of visits of a particular conversion step, then subtract the number of visits of the first step. Divide the new value by visits of the first conversion step.
By identifying when prospective buyers abandon the conversion process, companies can identify problems and make necessary adjustments to boost sales. With so many small businesses relying on the internet as a sales tool, funnel drop-off rate has become one of the most crucial performance indicators to track.
4. Revenue Growth Rate
It might be obvious, but the revenue growth refers to the rate at which a company’s income, or sales growth, is increasing. To find revenue growth rate, begin with your business’ total revenue for the current year. Next, divide current revenue by total revenue from the previous year to find the rate of growth.
By calculating revenue growth rate regularly, you can assess whether growth is increasing, decreasing, or plateauing. Use it to make any necessary changes to stay profitable.
5. Inventory Turnover
Inventory turnover measures the number of times inventory is sold or used in a given period of time, and is valuable because it reveals a business’ ability to move goods. Inventory turnover can be found by adding up the cost of sold inventory, then dividing that total by the value of the remaining at year’s end.
While it’s only natural for businesses to pursue a high turnover rate, companies should be wary of achieving this goal by reducing prices too significantly. Calculating your inventory turnover ratio can help you measure and plan for adjustments in inventory as needed.
6. Accounts Payable Turnover
A business can’t keep its door open for long if it fails to pay suppliers. Accounts payable turnover is a measure of the rate at which your business pays for goods and services, revealing the amount of cash spent on suppliers in a given period.
To find accounts payable turnover, add up the cost of total supplier purchases and divide by average accounts payable. Once you know how much you spend on suppliers, you can determine if steps need to be taken to reduce spending, which should boost long-term profits for your business.
7. Relative Market Share
One of the most crucial performance indicators, relative market share shows you how much of a given market is controlled by your business as a percentage. After finding your own market share, subtract this value from 100 to find the percent of the market controlled by other businesses. Then divide your market share by the percentage of the market not controlled. By multiplying the result by 100, a company can find its relative market share.
Unlike internal metrics, relative market share reveals how a company is performing relative to its competitors in the same space. After all, a small bump in profits may matter less if your company is falling behind its competitors. Once you calculate your relative market share, you can make strategic adjustments to your product and service offerings to improve long-term profitability for your business.
A company can’t make adjustments to its strategies and procedures if the people in charge don’t know how business is trending. By tracking KPIs regularly, business owners can measure various factors affecting their growth and make course corrections as necessary. In the long run, doing this gives companies the best shot at succeeding.
If you’re curious about what goes into developing a KPI, or have any questions about them, check out this piece, aptly titled What Are Key Performance Indicators?