What are Key Performance Indicators (KPIs)?
Key performance indicators are a formal way of categorizing, measuring, and analyzing the enormous amount of data that gets generated and flows non-stop through your business, every day, in every department, at all levels. Financial information, customer behavior, employee satisfaction, and asset tracking are some examples of the types of data points that are available for you to monitor.
The purpose of KPI reporting is to track the health of a company. This helps prevent companies from developing blind spots that could hinder company growth. Similar to how the human body consists of dozens of smaller systems working in harmony toward a shared goal, KPI reporting measures individual systems such as customer acquisition cost, net profit margin, cost of goods sold (COGS), etc. to communicate which systems and processes are working well and others that require polishing.
KPI reporting exists to aid businesses, so a crucial question becomes: which KPIs should I track? A broad array of KPIs could be beneficial to a variety of businesses in all industries, so it’s essential to know which ones will be the most beneficial for your business to track. But here are two pieces of good news: businesses of any size don’t have to track every KPI in existence, and the appropriate group of KPIs is determined by the unique nature of the business at hand. If a company were to attempt to track all KPIs, there would be a high chance that the business would be overwhelmed by the volume of information to track, interpret, and remedy. Fortunately, there are different elements to consider and questions to reflect on to ensure the most appropriate KPIs are chosen—the ones that are most closely tied to the success of your business.
How to Choose the Best KPIs for Your Small Business
Goal setting, especially for small and growing businesses, typically predicates success. With fewer than 10 percent of small business owners achieving their yearly goals, it’s essential to take the steps necessary to stand out among the crowd of other businesses that compete with yours in your industry and market. Here are three company pillars to review when choosing small business KPIs:
1. Business Goals
Understanding the current “health” of your company is crucial. The “health” of a business consists of several factors—financial health, process and technology health, and the emotional/physical health of your employees. All of these factors play a key role in the overall success of your business on a long-term time horizon. After evaluating each facet of your company’s health, establishing a vision for sustainable growth can transform into plans of action that lead to attainable goals.
To avoid the disappointment of not achieving a goal, there are four elements to consider when goal planning.
- 1. Goals must be measurable. Without objective measurement, companies can become lost in the subjective features of a goal. Subjective interpretation of data might make you feel good, but ultimately will not result in realistic goals.
- 2. Goals must be actionable. Brainstorming and idea boards may be helpful tools, but without a call of movement, no momentum will be harnessed by your business in order to move forward.
- 3. A time frame should be assigned to every goal. Due dates are not sheer stress inducers; they are also accountability holders. If you don’t assign set time frames for every goal, it becomes easy to push off important tasks and hinder overall growth.
- 4. Consider breaking down larger, more challenging goals into small yet manageable milestones that comprise the overall goal. For example, a hearth and fireplace services company may desire to triple their sales this winter relative to last year. . This statement would be the overall goal, but there are many smaller steps that must be taken to achieve the overarching goal. Some examples of smaller milestones would be to:
- Research and formulate a comprehensive, SEO-oriented strategy
- Generate a timeline for hiring new (perhaps seasonal) employees
- Perform research on local competitors
- Develop internal documentation focusing on service metrics and ways to improve them
The number of tasks needed to accomplish a 300% YoY sales increase would be longer than this, but these are just some examples of smaller goals that companies can use as proactive steps to achieve bigger, longer term goals. Almost always, it’s the assemblage of several smaller goals being completed that helps a company achieve large goals.
2. Business Stage
It is essential for a company to recognize which unique business stage it is at because it will determine which small business KPIs would be best suited. A new and growing company may want to focus primarily on KPIs related to gross vs. net revenue, whereas a more seasoned small business may want to concentrate on future growth elements such as new customer acquisition cost or branding efforts.
3. Business Model
When evaluating key performance indicators for adoption into your own company, the type of business (and industry) you’re in can determine the most relevant KPIs to monitor.
Brick-and-mortar service businesses (plumbing, hearth services, HVAC, etc.) will want to know how long the average service call lasts. Labor costs are typically high in service-oriented businesses. Critical KPIs for this business type might be Gross Revenue Per Employee, or Direct Cost of Services Performed, or Inventory Turnover Rate.
Online businesses, including traditional eCommerce sites, will be very interested in website analytics KPIs like these:
- How many unique users visit the site every day / week / month?
- Bounce rate. How many seconds does the average visitor stay on the site?
- Conversion rate. What percentage of unique visitors buy something?
- Percentage of visitor shopping carts that are abandoned before checkout?
Whatever business type or industry you’re in, there are KPIs that are directly proportional to the measurement of success.
Small Business KPIs For Every Company To Consider
The dynamic nature of each small business is unique, thus there is no “perfect” list of KPIs a company should track. There are, however, commonly used KPIs among smaller businesses that have proven to be effective. Below are eight widely adopted small business KPIs in today’s business climate.
1. Revenue Growth
This financial KPI informs leadership how a company’s income and sales are increasing. Revenue growth is associated with a set time frame (usually monthly), and the rate (a percentage) can be found with the following formula:
Monthly Growth Rate = (Total Revenue For Current Month – Total Revenue From Previous Month) / Previous Month’s Revenue
Revenue growth will increase, decrease, or plateau. This small business KPI is important because it ultimately reveals whether a company is on the right track for economic growth or if there is a need to course-correct.
2. Customer Acquisition / Retention Cost
Customer acquisition notifies a company how much it costs to acquire a customer. To calculate customer acquisition cost (CAC), the following formula is used:
= (Sales Expense + Marketing Expense) / # of New Customers
On a quarterly review, let’s say your marketing and sales outlay totaled $10,000 and netted 25 new clients, the CAC would be $400. The other side of that coin is customer retention, which reveals how fast a customer decides to stop doing business with your company, aka “churn rate.” Acquisition and retention create a ratio together and can help determine if there is a problem with the sales funnel or a customer support system.
2a. Customer Lifetime Value (CLV)
Though not a part of the original eight recommendations, a KPI that relates closely to customer retention and acquisition is the lifetime value of a customer. Understanding the CLV of any given customer allows your business to maximize every customer relationship. The following formula, which draws from other important small business KPIs, is used to calculate customer lifetime value:
= Average Order Size x Average Number of Purchases Per Year x Customer Retention Rate
3. Net Profit Margin
Net profit margin refers to how profitable your business is from the revenue it generates. One of the reasons why it is a common small business KPI is because it reflects how well a company is using its revenue. The following formula is used to find the net profit margin:
= Net Profit / Gross Revenue
4. Cost of Goods Sold (COGS)
The cost to deliver a single product or service (that is not connected to payroll) is known as the cost of goods sold (COGS). This small business KPI is critical to track because it allows you to monitor cash flow and bottom-line profitability.
5. Return On Investment (ROI)
To ensure that a company’s financial investments are generating both internal and external growth, the return on investment KPI compares a company’s revenue to the investment costs. Investments take on several forms such as individual marketing campaigns, business management software migration projects, employee education programs, etc. Where a small business tends to focus on customers and internal processes, a bigger enterprise is likely to focus on the entire supply chain.
6. Employee Productivity Investment / Turnover
Hiring and training employees is expensive! Including the employee productivity investment/turnover on a KPI report helps educate companies on how to improve employee satisfaction. If an employee stays at a company for a long time and works efficiently, there is a higher return on investment. It’s important not just to focus on hiring employees, but hiring employees who stick and stay. Improving the retention rate of valuable, skilled employees will improve the overall value of your business. The more you can automate your internal hiring processes, the less you’ll spend on employee acquisition.
7. Web Traffic and Conversion Rates
Incorporating an online presence comes with the responsibility of monitoring the influx or decline of web traffic. This small business KPI finds a company’s conversion rates by comparing the total number of sales to its web traffic.
This part of the KPI report can be impacted by trying new marketing campaigns or changing the design of a website. Does a simpler layout improve the ability to understand the product and find answers? Is a campaign working or does it result in flatline growth?
8. Social Media Engagement and Reach
Let’s face it. Social media is becoming more commercialized with a growing number of businesses—large and small—using social media platforms to increase brand awareness and influence new customers that may not be reached through traditional marketing channels.
The social media engagement and reach KPI measures how effective a company’s social presence is on different platforms. The importance of staying connected to your customers cannot be overstated. By tuning into this data, companies may find which social platforms are worth the time and monetary investment, as well as what kind of content their audience responds best to.
Though not an all-inclusive list of relevant KPIs, these small business KPIs and others have proved to be indispensable.
Using KPIs In Your Daily Decision Making
Once you’ve identified those performance metrics that best relate to the success of your business, you’ll want to stay on top of the information in real time. Generating, reviewing, and sharing an increasing number of individual reports can become cumbersome over time.
Instead, consider business management software that allows you to customize a KPI dashboard. A KPI dashboard processes the raw data and presents a visual, at-a-glance layout of meaningful charts, graphs, facts, and figures that allow you to make more data-driven decisions and fewer gut-driven reactions in response to incomplete information.
Small Business KPIs Are Crucial To Success
An effective KPI report for small businesses will be action-driven, measured with accuracy, timely, and help you achieve your company goals. With the help of an all-in-one business software platform, KPI reporting for small businesses becomes an invaluable tool for any business to drill down and bring into focus the most meaningful success metrics, easy to interpret and communicate to others for the good of a company’s long-term health and prosperity.
