- How key performance indicators can help you evaluate your business and guide your decisions
- Different types of KPIs, and whether the indicators are leading or lagging
- Net Profit, Customer Acquisition Cost, Lifetime Customer Value, and more
By Denis Jakuc
When starting up or expanding your small business, it’s easy to get so caught up in day-to-day activities that you lose sight of how the business is doing overall. There are lots of details to look at, and you may not realize which are the most important.
The answer is to establish key performance indicators (KPIs). These help you evaluate where your business is at, see where it’s going, and make decisions to improve it.
Which KPIs should you consider tracking?
Different businesses will measure different KPIs. Think about which metrics are particularly important to your business—which have the biggest impact on whether your company grows solidly or just struggles to survive. Then choose your critical KPIs based on which ones will indicate success or raise warning flags.
Tie your KPIs to your business goals. These could be related to customers, employees, operations, or marketing. Then determine which are the important things to measure that relate to those goals.
Some KPI measurements could include:
- Unique visitors
- Referrals
- Bounce rate
- Customer acquisition cost
- Customer churn rate
- Monthly website visitors
- Average order fulfillment times
- Customer satisfaction
- Inventory turnover
- Manufacturing process efficiency
- Employee productivity
- Average customer account size
Establish your business objectives for the quarter or year, then decide which KPIs will keep you on target. Review them monthly or quarterly on a regular basis.
The importance of a KPI can also relate to your business stage. Your startup will want to focus on cash flow to make sure you have enough money coming in to cover expenses. Once you’ve become more established, you may want to key on an employee retention KPI to continue to grow.
Also have a mix of KPIs that are leading indicators and lagging indicators. A leading indicator is forward-looking, influencing future results. Customer satisfaction is a leading indicator because satisfied customers are likely to return and give you more business. Profit is a lagging indicator because it only shows you past performance.
KPIs all businesses should track
There are a few financial KPIs that all companies should watch, because the success of every business is dependent on its financial health. The following five financial KPIs are good ones to keep an eye on.
Net Profit
This tracks your profit over time, showing whether you’re getting more or less profitable from year to year. Net Profit is the key measure of a company’s financial success. The calculation, shown below, is Revenue minus Cost of Goods (or Services) (CGS) Sold minus Operating Expenses (OE) minus Overhead (OH) less the cost of Taxes (Federal, State, and Local). This provides a measure of the overall company’s financial performance.
Net Profit = Revenue – CGS – OE – OH – Depreciation – Taxes
You may see a dip in profits during tough economic times, or when you invest in people, equipment, and facilities. That’s when it’s especially important to know whether your business earns more than it spends.
You will often see companies use surrogates for Net Profit, such as Cash Flow (which is normally calculated as Net Profit + Depreciation). Depreciation is a non-cash expense. Sometimes actions like the sale of Equity can also increase Cash Flow.
Cash Flow is especially important for small companies because it shows the immediate amount of cash available to operate the company. But in the long term, Net Profit and related parameters are a better KPI to track. Remember, all costs and expenses need to be considered to viably operate a company.
Net Profit Margin
This shows how much profit you earn as a percentage of the revenue you take in.
Net Profit Margin = New Profit ÷ Revenue
If you bring in $200,000 in revenue and have a net profit of $80,000, your profit margin is 40%. For every dollar you bring in, your business keeps $0.40.
Quick Ratio
This KPI monitors your cash flow — whether the cash, marketable securities, and money you expect to collect (receivables) will cover your liabilities.
Quick Ratio = (Cash + Marketable Securities + Receivables) ÷ Current Liabilities
If you have $10,000 in cash, $10,000 in receivables, and $16,000 in liabilities, your quick ratio is ($10,000 + $10,000) ÷ $16,000 = 1.25. A quick ratio of 1 or higher indicates you have enough cash and assets that will soon convert to cash to pay your outstanding bills. A quick ratio less than 1 means it will be more challenging to cover your liabilities.
Customer Acquisition Cost
As your business grows, it’s important to track what you need to spend to get a customer.
Customer Acquisition Cost = (Sales + Marketing Costs) ÷ Number of New Customers
If, in a three-month period, you spent $5,000 on sales and $5,000 on marketing and got 20 new customers, your customer acquisition cost was $500 per customer.
Lifetime Customer Value
Knowing what a customer is worth can help you decide what to spend on sales and marketing. If your average customer spends $1,000 with you over time, you want to be sure you spend well below that number to acquire the customer. On a project basis:
Lifetime Customer Value = Average Number of Projects x Average Cost of Each Project
On a retainer basis:
Lifetime Client Value = Average Retainer Price x Average Number of Months a Client Works with You
Customize Your KPIs
Many KPIs are relevant to only certain companies. For example, an online sales company may have very different KPIs than a more traditional bricks and mortar manufacturer of goods. Develop KPIs that align well with your own business.
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InnovatorsLINK Business Writer and Brand Strategist
A business writer his entire career and successful businessman. He was a partner in a top-10 Boston ad agency, a senior level executive at Young & Rubicam NY and Interpublic Group, and, since 2003, an independent consultant for companies from startups to global leaders, positioning their brands and writing all forms of content to promote their growth.
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