Key performance indicators (KPIs) are data trends that you can track regularly to evaluate the health of your business. They provide quick, easily accessible snapshots of how your operation is progressing and are valuable in predicting long-term performance. Because each business is unique to some degree, the KPIs you earmark may be different than those of other businesses in your industry. However, you can work with the following five kinds of financial data to customize the KPIs that are the best fit for your purposes.
Like any small business owner, you track your revenue consistently to make sure that your income maintains a steady pace. However, when you look at revenue as a KPI, you are more concerned with trends than specific numbers. For example, your revenue may trend downward at the end of each month, indicating the need for a new marketing strategy to boost those slow times. When revenue increases, you can pinpoint the reasons and maintain the trend.
You probably can quote to the penny how much you spend doing business every day. Your direct expenses may include materials and supplies for manufacturing, products, marketing and other purchases that you then convert to profits. When you look at direct expenses in terms of a KPI, you consider spending trends. Perhaps you are making all of your expenditures at the end of the month when many other bills are due. It could be better for your bank account if you spread out your direct expenses over the course of each month instead.
Overhead typically consists of your ongoing business costs that do not directly pertain to profits, including leasing office space and paying your employees. It may be fixed, i.e., it stays the same every month, or variable, i.e., fluctuates with market rates or seasonality. For example, if you hire extra people during the holidays or rent extra warehouse space at certain times of year it will change your overhead costs. Tracking overhead as a KPI helps you stay current on small increases that might otherwise go unnoticed. That way, you can make adjustments to preserve cash flow or limit exposure to additional costs.
Gross Profit Margin
Your gross profit margin is the percentage of each dollar you earn after subtracting direct expenses. This KPI is an important indicator of how well you are doing in balancing income and output. Ideally, you want to see the percentage trending upward, but price increases from your suppliers, for instance, may have the opposite effect. Being on top of this KPI means being able to adjust your pricing to keep your gross profit margin strong.
Net Profit Margin
Your net profit margin is naturally slimmer than the gross margin because it accounts for overhead as well as the cost of services, showing what you actually bring in once everything is paid. Tracking this KPI gives you a look at the big picture and how it changes over time. If your net profit margin is trending down, you probably need to rebalance your operation by taking a look at overhead expenses for a healthier bottom line.
Additional KPIs that Show Significant Trends
Your business growth is a KPI that indicates progress toward your professional goals. Growth might mean the expansion of your client base, adding goods or services, increasing your revenue or expanding brand recognition into new markets.
For small business owners, clients are a leading measure of success. This KPI tracks changes in the size of your client base and in the average revenue you earn per client. This KPI can help you keep current on:
- Changes in your target demographic
- Customer satisfaction rate
- Client retention rate
- Number of repeat customers
- Customer satisfaction rate
This KPI tracks how quickly the market is growing and whether your company’s market share is keeping pace. When you have a handle on what’s happening in your industry, you are better able to make savvy decisions that ramp up your growth. For example, if you sell garden seeds and your market KPI shows a spike in sales of organic seeds across the board, you’ll know the time is ripe to go organic.
Your employee KPI is bound to be a significant measure of the overall health of your business. This key performance indicator not only reveals objective data like the average revenue an employee generates but also intangibles like how satisfied they are with their jobs and how engaged they are with their daily tasks. Employee engagement indicates enhanced productivity and leads to a lower rate of attrition, which benefits your bottom line.