Updated: Sep 26, 2019
I come from a corporate background where tracking Key Performance Indicators was the norm every month. In fact one of the organisations I worked for had a whole Performance Indicator reporting process to go through every quarter with different members of staff tracking different KPIs every month and reporting on the businesses performance. This organisation measured performance in every service area even tracking things like employees sick days. For a small business, a 20+ page document would of course be overkill but I do feel that it's very important particularly for small businesses to track a handful of KPIs which give them real information about how their businesses are doing.
So what is a KPI?
A KPI is a measure of performance and can be used simply to track anything which you can measure. Sales, customer satisfaction, return on different kinds of spend, and of course KPIs can be used to measure financial aspects of your business.
How can I use KPIs?
Once you've decided what your KPIs can be, you should set a target for each of them. You might want to calculate them for your business so you know where you stand at the moment, and what a realistic target could be, but you'll also have a feel for where you want to be from your business strategy and from bench marking against other businesses. Measuring your KPIs each month will allow you to track the trend, to ask questions where things haven't been going in the direction you were hoping, and to set more challenging targets to help your business get better and better. A handful of KPIs should form part of the monthly reporting you do for your business, and they don't all need to be financial KPIs.
Which KPIs should I track in my small business?
Now this comes down to the business and its objectives, and this varies from business to business, so I'm going to talk you through a handful of KPI's which can get you started with monitoring your business.
This is a really good place to start especially if you are new in business and perhaps not profitable yet. Break-even point gives you the answer to the question "how much do I need to sell in order to cover my overheads?". This is important to know because all businesses have some overheads, whether that's rent or insurance costs, professional costs, you might even have some salaries to cover and the requirement to pay national insurance and pension contributions alongside that.
To calculate break-even point simply use your budget to add up all of the monthly overheads your business incurs. This is how much you need to sell each month in order to cover your overheads and break-even. You can monitor this by reviewing whether your overheads change from month to month and you can monitor your sales figure against your break-even point.
Gross Profit Margin
Gross profit is simply how much money (profit) is left over after you've paid the direct costs associated with producing the product or service you're going to sell, expressed as a percentage.
If you sell wedding cakes which for £500 and your costs of ingredients are £100, you make a £400 gross profit on each cake, or 80% (400/500*100%).
If you're a graphic designer designing stationery for a client for which you'll charge £1,000 but the direct costs (including printing) are £100, you'll make a gross profit of £900 or 90% (£900/£1,000*100%).
This is a useful KPI because it helps you keep track of whether your direct costs are eating into your profit margins for each product or service line. If you make a loss on a sale before you've started covering your overheads, you might want to reconsider the suppliers you're using for your direct costs or the sales price of your product or service.
Net Profit Margin
Taking this one step further, net profit is how much money (profit) is left over after you've paid all your business costs, expressed as a percentage.
If you make sales of £100,000, your direct costs are £20,000 and your overheads are a further £50,000, you will make a net profit of £30,000 or 30% (£30,000/£100,000*100%).
Net profit is generally calculated for the whole business and it's a useful KPI as it gives you a high level view of how the business is doing.
Cash to debt ratio
If your business has debt perhaps an overdraft or some borrowing you want to know whether you will have enough money in the bank to cover your short term liability to pay back that debt as it falls due.
To calculate this KPI you need to know how much money you have in the bank and divide that by the Debt repayments that you will need to make in the coming 12 months. So if you currently have a bank balance of £20,000 and you have £10,000 of repayments due in the next year, you will have a cash to debt ratio of 2, which more than covers your debt repayments. If you had a cash to debt ratio of less than 1 this would signal a potential problem with liquidity in the next year.
If you invoice your customers, this is an incredible important KPI to keep track of. If your customers are slow at paying you, this can cause you all sort of cash flow problems and this KPI tells you at a glance how many days on average your customers are taking to pay you.
It's calculated by taking the amount of invoices currently outstanding divided by the average value of credit sales for the year. So if you currently have £30,000 of invoices outstanding, and on average in the year, you invoice about £200,000, your average customer is taking 55 days to pay you. If your payment terms are 30 days, this is a warning sign that your credit control function isn't very efficient and needs some attention, or that you should consider taking some of your payments up front to reduce the risk to your business and your cash flow.
Sales and Customer KPIs
Revenue per employee
If you hire a team, this can be an incredibly useful KPI as it helps you keep track of how much income is being earned per member of the team. This is calculated regardless of their role (although in some sales-focused businesses it's not uncommon to measure revenue per sales person). It can help you to identify where your team might be inefficient and it's also very useful to help you make decisions about whether hiring an additional team member will be worthwhile in terms of whether sales revenue generated by that new hire will cover their cost.
This KPI is calculated simply as revenue / employees, so if you make sales of £200,000 and you have four staff, you earn £50,000 per employee.
Average sale value
This is an incredibly useful KPI for measuring the average revenue received from every sale. It's particularly straightforward to calculate if you invoice your clients as it's calculated simply as revenue divided by number of invoices raised.
If you sell online or in person taking payments through your till you might like to calculate revenue divided by number of sales transactions if your till will give you that information, or revenue earned each day the shop was open, each of these will give you a meaningful measure of your sales revenue and will help you identify opportunities to perhaps up-sell to your customers for example by offering add-ons before they check out online or by identifying days which are more popular perhaps justifying longer opening hours if you work face to face.
Customer acquisition cost
One grey area for many businesses is the value of their marketing spend. Marketing can cost a lot of money and if your marketing in several places it can be difficult to know which marketing campaign is paying off and which isn't.
One way to keep track of your customer acquisition cost is to keep track of all of your new leads, identifying how they found you. You can ask them in person or online when they place their orders. You should then categorise spend on different marketing campaigns separately so that you can divide cost of a campaign by leads generated from that campaign to give you a customer acquisition cost metric.
So for example, imagine that in January you spent £2,000 on Facebook ads, and £5,000 on a newspaper ad. You generated 100 new leads, 50 of which came from Facebook and 40 from the newspaper ad, and 10 from referrals. Your customer acquisition cost from the Facebook campaign was £40 (£2,000/50), £125 (£5,000/40) from the newspaper ad, and £0 for referrals.
This might lead you to focus more on spending on Facebook ads which are more cost effective than newspaper ads for you, and even perhaps to trial a referral programme with a cash incentive as this is also generating plenty of leads.
Without getting all mathsy on you, you could also take this a step further by calculating actual sales revenue for each of these leads as a separate metric, as you could find that although you get more leads from one platform than another, those aren't necessarily leads which convert into the highest paying customers.
Non financial customer KPIs
Of course there are plenty of non-financial KPIs you can measure around customers. If you have an online community you will want to know how many members you have and you might have a target for members and monthly growth of membership. You'll want to measure customer satisfaction and this could be based on results of a survey post-sale or the review scores you get on an independent review site, you might wish to monitor your customer returns percentage or if you are using a third party to produce your goods will be measuring the perfect order percentage as you would be targeting sending out 100% of orders in perfect condition to customers.
We love working with our clients to develop and monitor KPIs which are important to them in their businesses and if you're ready for more support with your monitoring your business's performance each month, please speak to us about how we help growing businesses.