Business
May 28, 2024
Running a small business means you need to track Key Performance Indicators (KPIs) to see how well you’re doing. If you ignore them, you might end up with confusing data and unclear goals. But by focusing on the right KPIs, you can reach your business goals and spot any problems.
Many small businesses find it hard to choose the right metrics to track. There are so many options, like profits and social media impact, that it can be overwhelming to know where to start.
In this blog, we’ll explain what KPIs are, how to pick the right ones for your business, four key KPIs to track, and other important metrics to consider.
KPIs are measurable values that help track and predict a company’s performance towards a specific goal.
They give an overview of several data points, making it easier to focus on one key indicator without getting lost in a detailed analysis.
KPIs are often shown as percentages or simple ratios and are usually presented in reports, charts, spreadsheets, or other visual formats.
So, what specific KPIs should you track for your small business? Whether you’re a startup or an established company, monitoring these four indicators can help you reach your goals.
Net profit, also known as net income or the bottom line, is the amount of money a business retains after accounting for all expenses and costs. It represents the true profit earned by the business during a specific accounting period, typically a quarter or a year.
The basic formula for calculating net profit is:
Net profit = Revenue – Total Expenses
Here’s a breakdown of the components:
Revenue: This is the total income generated by the business from its sales or services.
Total Expenses: This includes all costs incurred by the business to operate, including:
Cost of goods sold (COGS): The direct costs associated with producing the goods or services sold, such as materials, labor, and manufacturing overhead.
Operating expenses: The ongoing expenses of running the business, such as rent, salaries, utilities, marketing, and administrative costs.
Interest expense: The cost of borrowing money, such as interest on loans.
Taxes: The amount of taxes the business is required to pay, such as income taxes and property taxes.
Not to be confused with net profit, net profit margin refers to how much profit is generated as a percentage of revenue.
The figure is expressed as a ratio or percentage. For example, a net profit margin will show how much profit the company gains for every dollar in revenue.
Net profit margin expresses the percentage of profit a company generates from its total revenue. It’s calculated as:
Net Profit Margin = Net Profit / Revenue x 100%
Think of it this way, for every dollar of revenue earned, how many cents translate to actual profit after all expenses and taxes are accounted for?
The beauty of the net profit margin lies in its ability to compare profitability across companies and even industries. It transcends the absolute dollar amounts of profit, allowing for apples-to-apples comparisons regardless of a company’s size or revenue scale.
While a high profit margin certainly indicates your ability to minimize expenses and manage your business effectively, its true significance goes beyond simple numbers. Investors understand its power as a key performance indicator because it speaks volumes about your company’s:
Operational Efficiency: A high margin signifies you’ve mastered extracting maximum value from your resources. You’re minimizing waste, negotiating effectively with suppliers, and keeping tight control over operational costs.
Pricing Power: It reflects your ability to command premium prices for your products or services. This could stem from a unique value proposition, strong brand recognition, or efficient marketing strategies.
Competitive Advantage: In a crowded market, a high margin suggests you’ve carved out a niche with sustainable profitability, separating you from competitors who might struggle with lower margins.
Future Growth Potential: Investors see high margins as a strong indicator of future profitability. It suggests you have a clear understanding of your costs and pricing, which are crucial for scaling your business effectively.
Customer Acquisition Cost or CAC, is the cost of acquiring a new customer for your business. It’s expressed as a sales and marketing expense divided by the number of new customers.
Sales and marketing expenses could include everything from the salaries of your marketing team to the cost of pay-per-click advertising on social media channels.
The core formula for CAC is straightforward: Sales and marketing Expenses / Number of New Customers. But the true picture lies in what constitutes those expenses. It’s not just salaries and social media ads. Consider this expansive list:
Direct costs:
Indirect costs:
Also Read: Top Marketing Tips for Your Small Business
Customer Lifetime Value (CLV), often referred to as lifetime customer value, goes beyond a single transaction. It paints a broader picture, revealing the total net profit you can expect from a single customer throughout their entire relationship with your business.
This value encompasses not just their initial purchase, but also repeat purchases, upsells, referrals, and the overall duration of their loyalty.
Here’s why CLV is critical for small business owners:
Acquisition costs bite: The harsh reality is, that attracting new customers can be significantly more expensive than nurturing existing ones. Marketing campaigns, discounts, and promotions all eat into your budget. By focusing on CLV, you shift your mindset from constantly chasing new buyers to maximizing the value of the customers you already have.
Loyalty breeds value: Imagine a customer who not only loves your products but becomes a brand advocate. They buy regularly, try new offerings, and sing your praises to their friends and family. Such a customer embodies a high CLV. By prioritizing customer satisfaction and building loyalty through excellent service, engaging experiences, and personalized offers, you cultivate these valuable relationships.
CLV guides your strategy: Knowing your CLV empowers you to make informed decisions. You can:
Focusing on CLV is a smart investment for your small business. It helps you:
Exploring key performance indicators (KPIs) across different areas like sales and marketing shows how important these metrics are for understanding and improving performance.
An example of a KPI for a sales business might be the profit per unit sold of a specific product. KPIs are also commonly used in sales to track metrics like the Sales Conversion Rate, which measures the percentage of leads that turn into sales.
In marketing, a KPI could be the conversion rate, which measures the number of clicks on a specific call to action (CTA). Another example is the Cost per Lead (CPL), which measures the cost of acquiring a lead through marketing efforts.
Every small business is unique, so the KPIs you track should reflect this. Here are three tips to help you choose the right metrics.
Start by thinking about what success means for your business right now.
For example, if you want to build a more productive team, focus on performance metrics for staff. If you want to increase sales, look at profit and marketing spending metrics.
You can focus on both, but remember that simplicity is key. Having too many KPIs can be overwhelming and defeat their purpose. Some common business objectives include:
Also Read: 6 Content Marketing KPIs to Track in 2024
Are you a new brand entering the market? Your KPIs might be different from a large, established company like Apple.
New businesses often focus on basic KPIs to simplify processes and build their brand. For example, they might track net profit or customer loyalty. They might also focus on marketing metrics like customer acquisition cost (CAC) or clicks.
An established business might focus on KPIs for retaining talent or managing their debt-to-equity ratio.
“Indicators” are measures that show market and business trends.
Lagging Indicators: These show the results after an event. For example, the unemployment rate often rises after a market crash.
Leading Indicators: These predict future events. For example, an increase in company bankruptcies might predict an economic downturn.
Think of it this way: leading indicators predict trends, and lagging indicators confirm them. Successful businesses monitor both types.
Your KPIs are like a health check for your business. Regularly tracking them and knowing what to look for can keep your small business in great shape.
Monitoring key metrics is not just recommended but essential for the success of your small business. This way you can collect more & more data about your business and can do iteration for your success.
