While a solid profit margin is a great way to measure the success of your small business, it is certainly not the only one; that’s why this article will focus on how to use these benchmarks to track your success. KPI’s (or Key Performance Indicators) value a business’ success in terms of whether or not it reaches the goals it sets for itself. Tracking KPI’s can assist greatly when making business decisions related to development and growth.
Here are the seven KPI’s you should keep track of in your small business:
Putting together a cash flow forecast helps businesses determine whether or not they have appropriate sales and margins. This makes a cash flow forecast one of the most important KPIs to track for all small businesses. You can easily create a cash flow forecast by adding the total amount in your bank account to the amount of cash you expect to come in over the next month. Then subtract the amount of cash you expect to go out over the next month.
It is wise to put together cash flow forecasts regularly so that you can get ahead of any cash shortages and make necessary changes. This is also critical for use in tax planning and for future loan applications.
It is impossible for any business to achieve success if they are spending more money than they make each month. Using gross profit margin as a percentage of sales helps greatly to see how total profits compare to expected revenue.
You can determine your gross profit margin by dividing gross profits by sales. Then multiple it by 100, and you will see your GPM as a percentage.
To then see how much your gross profit margin reflects within your overall sales, divide that percentage by your sales amount.
Tracking your GPM is an essential Key Performance Indicator because it helps you to understand how much money you get to keep in the bank versus the percentage that has to be paid to your suppliers. As your business earns more money, your GPM will also increase. But a decrease to your GPM could be an indicator that your business is spending too much money on supplies. If that were the case, you would either need to make a reduction to your overhead costs or increase your prices to compensate.
Another benchmark to track your success is calculating the funnel drop-off rate. This is used to determine how many visitors abandoned the conversion process (also known as the sales funnel) before it is completed.
To understand what the sales funnel represents, try and imagine it as a real funnel that is pointed down. The top is the widest part and represents the beginning (or entry point) when the customer first becomes acquainted with your product and company. Then more conversion points occur along the sales path, progressing from the top to the bottom of the funnel. So the funnel drop-off rate is how many customers exit the funnel before making a purchase.
You can calculate your funnel drop-off rate by determining how many visits there are to each conversion step. Then subtract that number from the first step, and finally divide the resulting number by the number of visits to the first step.
When you determine how many of your potential customers jump ship early, you can see where your problem areas are and make the necessary changes to boost your sales. This is especially critical for small businesses that rely heavily on the Internet to make sales.
The revenue growth rate is the rate at which your income (sales) increases. You can calculate your revenue growth rate by taking your company’s revenue from the current year and dividing it by the total revenue from the prior year.
Calculating your revenue growth rate often helps you to determine whether your business is growing, slowing down or decreasing rapidly. Knowing how your business is growing can help you make necessary adjustments to achieve maximum profitability.
Calculating inventory turnover allows you to see the total times your inventory has been used or sold over a specific period of time. This is a valuable tool that reveals how well your business moves its goods. You can calculate your inventory turnover by diving the cost of inventory sold by the value of remaining inventory at the end of the year.
While many businesses value a high inventory turnover rate, you should be wary of reducing prices too much to achieve it.
No business can keep its doors open for very long if it can’t pay its suppliers on time. Accounts payable turnover is the rate at which your business makes payments for goods and services. In other words, it reveals the total cash your business spends on suppliers within a specified period of time.
You can calculate your accounts payable turnover by adding up the total cost of supplier purchases, then dividing that amount by the average accounts payable. If you find that your business needs to reduce spending on suppliers, you can take the necessary steps to make those reductions, which will increase your business’s long-term profitability.
Relative market share is one of the most important performance indicators because it reveals how much of the market is controlled by your business in the form of a percentage. Calculate your market share percentage by subtracting your business’s market share from 100. Then divide your business’s market share by that percentage your business doesn’t control. Finally, multiply that number by 100 to determine your company’s relative market share.
The relative market share is so valuable because unlike internal metrics, this percentage tells you how your company is performing relative to your competition. Once you know how much of the market your business controls, you can make any necessary strategic adjustments to aid in your long-term success and profitability.
As you use these benchmarks to track your success, keep in mind that without the information from these key performance indicators, it will be impossible to know exactly how well or poorly your business is doing. These KPI’s will help you to make the appropriate changes to procedures and strategies that will take your business to the next level.