When navigating the unpredictable small business landscape, being equipped with the right information is often essential. To avoid as many obstacles as possible, small business owners may consistently track key performance indicators (KPIs). These metrics are typically vital to informing business objectives and staying competitive. They may help you assess your company’s financial health and customer and employee satisfaction.
The best KPIs for a small business often differ among companies based on each company’s business goals. That said, the principles for determining which KPIs matter most are typically ubiquitous to all organizations. Below are some tips on how to determine which KPIs you should measure and how they may be able to guide your company to success.
What makes a business successful?
Before finalizing which KPIs your business should assess, it’s generally important to consider how your company defines success. Read on for five of the key components of many thriving businesses.
Keeping detailed financial records
When creating the roadmap for your business, meticulous financial records are often fundamental. A strong understanding of incoming revenue and expenses is generally necessary to pursue any long-term business goals. With comprehensive financial documentation, you’re typically better equipped to see where you’ve been, where you’re going, and what assets are available in case of an emergency.
Pursuing a mission
Establishing a clearly defined mission should generally be your business’s first objective. This way, all your business goals reflect your organization’s purpose.
Additionally, your mission statement will typically inform your product, branding, and the types of customers to attract to your business. When the need to change direction arises in any area, your mission will serve as your North Star.
Focusing on customers
As a small business owner, your customers are arguably your most valuable asset. Without them, your products or services would have no home. Learning what drives customers to seek out your business – and equally as important, what motivates them to return – may ensure business growth. No matter which business decisions you’re making, customer satisfaction should always be at the center.
Continuing to innovate
One thing that remains constant in the ever-changing small business world is the need to adapt. Whether it’s employing the latest technology or adjusting based on the latest consumer trends, continuous innovation is typically necessary to stay ahead of the competition. When you prioritize innovations that improve your product or service, you may better stand out from the pack and increase your customer loyalty.
Retaining employee talent
From customer satisfaction to ensuring streamlined processes, employee fulfillment generally affects all aspects of your organization. Prioritizing areas such as building a good management team and listening to employee feedback may keep your team happy and help minimize employee turnover.
Why are KPIs so important to a business?
Recording KPIs on a consistent basis is typically an easy way to get the full picture of your business’s progress toward the above marks of success. Your KPIs may help confirm what’s driving your success when your business is doing well.
Similarly, when you fall short of your business goals, you may review your KPIs to identify any gaps and see what’s not working. From there, you may quickly course-correct.
How to identify the best KPIs for your business
In determining which KPIs are critical for your business, it’s typically essential to first evaluate your priorities. Are you an established business owner looking to reach new markets or increase revenue? Or do you run a new business that needs a stronger customer base? Some KPIs require a significant amount of data over time, so some KPIs may only be relevant to your business down the road.
Once you’ve identified your primary business needs, you should consider choosing KPIs that are measurable, actionable, and timely. You should also consider prioritizing metrics that impact your bottom line. With accurate, quantifiable data, you may make tangible decisions, and you’ll likely be better equipped to identify your business’s strengths and weaknesses in real-time.
7 KPIs to track for small business success
Below are seven commonly used KPIs and what they reveal about the state of your business.
1. Cash flow forecast
You may have heard the phrase “cash flow is king,” and for good reason. Cash flow – the amount of money entering and leaving your business within a period – typically serves as a snapshot of your financial stability. This generally makes it one of the most important financial metrics to track.
Through regular projections known as cash flow forecasts, you may assess whether your cash flow strategies are working. You’ll likely also know whether you need to make adjustments before any cash flow issues become critical.
2. Gross profit margin as a percentage of sales
Your total revenue doesn’t always directly reflect your financial well-being. Instead, you should consider calculating your gross profit margin. This figure is the difference between your sales revenue and cost of goods sold (COGS), then divided by your net sales. It generally tells you how much money your company is bringing in per sale. Higher margins typically indicate greater efficiency.
3. Revenue growth rate
Your revenue growth rate generally measures the percentage of your company’s revenue increase over a period. You’ll divide your increase or decrease in revenue for the period by the revenue for the prior period to get this number. This may be an especially helpful metric for showing investors your company’s growth.
For less mature organizations, tracking revenue growth on a monthly basis is typically best practice. As your monthly recurring revenue stabilizes and your business matures, it may be appropriate to consider tracking this metric quarterly or annually.
4. Relative market share
Relative market share may serve as a benchmark against which to compare your business to competitors. It refers to the amount of a market that your company commands.
This KPI can be particularly useful when internal data doesn’t tell the whole story. For example, a decrease in profits may not be viewed as negatively if competitors in your market are experiencing a similar decline. You may be able to determine relative market share through a small business competitor analysis involving research on your key competitors to evaluate their strengths and weaknesses.
5. Customer retention
Customer acquisition costs are typically much higher than the cost of keeping an existing customer, so retention is generally crucial. To calculate your customer retention, subtract your number of customers acquired during a period from your total number of customers. Divide that by your starting number of customers to get your retention rate.
Higher figures typically reflect greater customer satisfaction with your products and services. They also typically signal that your business objectives are in line with market needs.
6. Customer lifetime value
Not all customers carry equal value. Your customer lifetime value (CLV) may predict how frequently customers will return to your business and how much they’re likely to spend.
This metric may be especially useful when developing short and long-term marketing and sales strategies. Calculating it requires data on average purchase value, purchase frequency rate, and customer lifespan. As such, it may be most suitable for more established businesses.
7. Quick ratio
With the uncertain nature of running a small business, knowing that you can weather a financial emergency may help you find peace of mind. A high quick ratio value may help confirm that your company has what it takes to bear tough times.
The quick ratio is the ratio of your company’s liquid assets to its current liabilities. It thus shows your company’s ability to pay off debts with your cash on hand and any assets you can quickly turn into cash. It provides an important snapshot of your company’s financial fitness that may, at low values, point to a need for more assets. If your typical cash flow isn’t enough to bring in those assets, seeking funding from outside sources may help.
Obtain small business funding through SmartBiz®
KPIs play a substantial role in achieving business goals – they may be able to show you where to make improvements and how to do so. If extra cash would help you act on your findings, you can use SmartBiz to seek funding through SBA loans, term loans, and custom financing. Check now whether you pre-qualify* – it only takes a few minutes to get one step closer to achieving your goals.