Although it’s up to you to determine which KPIs are best for your firm, we’ve included seven of the most relevant KPI meanings that small business owners should consider using.
1. Cash flow forecast
Cash flow forecasts let businesses assess whether their sales and margins are appropriate, and are consequently one of the most critical KPIs for small companies to track. To make your cash flow forecast, add the total cash your business has in savings to the projected cash value for the next four weeks, then subtract the projected cash out for the next four weeks.
Savvy business owners perform regular cash flow forecasts so they can identify problems in the early stages and make necessary adjustments. Cash flow forecasts can help businesses anticipate future surpluses or shortages. They can also help with tax planning and loan applications.
2. Gross profit margin as a percentage of sales
No business can achieve success if it’s paying out more to suppliers than it’s netting in sales. Gross profit margin as a percentage of sales demonstrates total profits compared to revenue.
First, find your business’s gross profit margin (GPM) by dividing your gross profit amount by your sales. Divide that value by your sales amount to find out how much of your GPM makes up your overall sales. Multiply that by 100 to express your gross profit margin as a percentage of sales.
The benefit of tracking this KPI over time is that you can easily quantify how much money you’re keeping against the amount paid out to suppliers.
As businesses retain more money, gross profit margin increases. But a decrease in gross margin as a percentage of sales could indicate that a company is overspending on its supplies. Owners would need to reduce overhead costs or increase prices on goods and services to compensate.
3. Funnel drop-off rate
Your funnel drop-off rate assesses the number of visitors who abandon a conversion process — or sales funnel — before completion. To calculate funnel drop-off, start by finding the number of visits for a particular conversion step in the funnel. Then, subtract the number of visits that occurred during the first step. Divide the value from the specific conversation step by the visits that took place during the first step to find the number of customers that you lost along the way.
By identifying when prospective buyers abandon the conversion process, companies can identify problems and make necessary adjustments to boost sales. With so many small businesses relying on the internet as a sales tool and with face-to-face interaction declining, funnel drop-off rate has become one of the most crucial performance indicators to track.
4. Revenue growth rate
Revenue growth is a financial KPI that refers to the rate at which a company’s income, or sales growth, is increasing. To find revenue growth rate, begin with your business’s total revenue for the current year. Next, divide current income by total revenue from the previous year to find the rate of growth.
By calculating the revenue growth rate regularly, you can assess whether growth is increasing, decreasing, or plateauing, and by how much.
5. Inventory turnover
Inventory turnover measures the number of units sold or used in a given period and is valuable because it reveals a business’s ability to move goods. Inventory turnover can be found by adding up the cost of sold inventory, then dividing that total by the value of the inventory remaining at year’s end.
Businesses should want to pursue a high turnover rate, but not by slashing prices significantly.
6. Accounts payable turnover
A company can’t keep its doors open for long if it fails to pay suppliers. Accounts payable turnover is a measure of the rate at which your business pays for goods and services in a given period. To find accounts payable turnover, add up the cost of total supplier purchases, and divide by average accounts payable.
Once you know how much you spend on suppliers, you can determine if you need to take steps to reduce spending.
7. Relative market share
One of the most crucial performance indicators, relative market share shows you how much of a given market your company controls. Unlike internal metrics, relative market share reveals how a company is performing relative to its competitors in the same space. A small bump in profits may matter less if your company is falling behind its competitors.
Once you calculate your relative market share, you can make strategic adjustments to your product and service offerings to improve long-term profitability for your business.
The most successful businesses use KPIs in some form or fashion to help them measure company success. As a small business owner, you should work to implement KPIs into your business strategy. Doing so can help you evaluate your progress and set new goals.
There are various types of KPIs, and the opportunities to define KPIs are endless. Starting with the seven that we provided is an excellent way to get your company on track.