Running a business is both exhilarating and challenging. There are many moving parts to keep on top of, not least the overall health of the business. Revenue and profit is just the tip of the iceberg, which is why you should be tracking Key Performance Indicators (KPIs) that will tell you how well you’re progressing towards critical business objectives.
KPIs are important because they show whether you’re making the right decisions and if your strategy is sound. You understand where your business has been, where it is now and where it is heading. Tracking KPIs over time reveals ongoing success, enabling you to look back at what you have achieved.
Defining and choosing the right KPIs for your business
Your KPIs should be specific and measurable so you know when you have achieved your goals. KPIs should be time-bound, rather than vague. They should relate to real and tangible business progress, enabling you to track business growth.
For example, one of your KPIs could be to track conversion rate. A business goal is to increase conversion rate by 10% by the end of Q1. In order to achieve this, we’ll improve the UX of our website and spend more on SEO.
Business KPIs should be actionable, directing companies towards a specific action. They should be measurable, tied to a specific metric that is easy to calculate. KPIs should be measured using current data, so they are tied to a present point in time. Finally, they should relate to overall business profitability.
10 KPIs that can help you grow your business
1. Cash flow forecast
Cash flow forecast is critical to track because it tells you how much money is coming in and out of the business. It is calculated by predicting the number of sales your business can expect in the next month, then working out your day’s sales outstanding – roughly how long it takes customers to pay you. Finally, work out the expenses your business expects to pay during the next month. Combine the current month’s predicted sales to the previous month’s cash balance, then take away your predicted expenses.
2. Gross profit margin
Gross profit margin tells you your total profit compared to revenue. Your business will only flourish if sales exceed expenses. Calculate gross profit margin by taking your gross profit amount (which is your revenue subtracted by cost of products sold) and dividing it by your total revenue. Take that value and divide it by your sales amount, which will tell you how much of your gross profit margin is a proportion of your total sales.
3. Funnel drop-off rate
Funnel drop-off rate tells you how successful your conversion process is by measuring how many potential customers fail to complete it. For SaaS-based websites, funnel drop-off is when people don’t complete the signup form after landing in the sign-up page. Calculate funnel drop-off rate by identifying how many customers started the conversion process, then minus how many customers completed a second step to get the number of customers who abandoned. Finally, take the number of customers who didn’t complete the funnel and divide by the total number of those who started the process to end up with the proportion of customers who dropped off.
4. Revenue growth rate
Revenue growth rate is an important financial KPI to measure because it tells you how your revenue is increasing over time. Calculate revenue growth rate by taking the current year’s total revenue, and divide that by total revenue from the previous year. Revenue growth rate shows you whether growth is increasing, decreasing or stagnating.
5. Inventory turnover
Inventory turnover tells you how many goods were sold in a particular time period. The object of business is to move as many products as possible, resulting in a high inventory turnover. The challenge is matching inventory to demand. Calculate inventory turnover by totalling the cost of sold inventory, then dividing it by the value of the inventory you have left at the end of the year.
6. Relative market share
Relative market share tells you how well you are performing compared to your competitors. This KPI looks outward to show how much of the market you control and can be more important to track than profit alone. Find out your relative market share by contrasting your market share against your rival, found by searching for research report PDFs online or looking for presentations on SlideShare. Market share can either be measured in volume (units) or in revenue ($). Take your market share and divide it by their market share, then times by 100.
7. Customer lifetime value
Customer lifetime value tells you how profitable each individual customer is over their entire relationship with your business. It helps to understand how much you are spending to acquire a customer versus the revenue you expect to generate from that customer. You calculate CLV by taking the average value of a purchase multiplied by the number of times the customer purchases in a year, then multiplied by the average length of the customer relationship with the business in years. Customer Lifetime Value for SaaS means how long they keep subscribing for a product before they churn. So it is not a one time purchase followed by multiple purchases, but rather how long they are a customer for.
8. Customer retention
Customer retention is the number of customers that your business retains over time, versus your customer churn rate. Find out your customer retention rate month-by-month by taking the number of customers you have at the end of the month, and reducing the number of new customers you’ve acquired during the month. Divide this number by the number of customers you had at the beginning of the month, and times by 100.
9. Quick ratio
Quick ratio is a KPI that tells you how able your company is to pay back current debts by selling off the cash assets it holds within 90 days. Quick ratio is calculated by adding up all your liquid assets and dividing them by your liabilities. The industry average for quick ratio is one, with the ideal quick ratio being more than one.
10. Net promoter score (NPS)
Net Promoter Score measures how loyal a customer is to your organization and how likely they are to recommend it to others. It is conducted with a simple survey that asks a customer “How likely are you to recommend [company] to others?” which is answered on a ten-point scale. 0-6 results in a detractor, 7-8 is a passive, and 9-10 is a promoter. Calculate NPS by subtracting the percentage of detractors from the percentage of promoters.
Tracking these ten KPIs will accelerate your business growth by telling you how well your company is doing. When your company has access to the hard data, you eliminate guesswork and are able to make the necessary changes to ensure your business will thrive. KPIs give you something to aim for and a concrete way to measure success.