Running a small business means juggling a lot of duties. You focus on your business goals while dealing with lots of disparate details. However, there is a way to keep track of your core concerns while still juggling all those tasks. You may utilize small business KPIs.
What’s a KPI?
KPIs are key performance indicators. These measurement tools are a must-have on your entrepreneur checklist.
Why do you need small business KPIs? Rather than blindly running your business, KPIs provide hard data on which to base your decisions. KPIs can tell you about past performance and help you predict future opportunities and threats. It is also a precursor to implementing process automation for small businesses. This is because KPIs will highlight areas ripe for automation.
How Can We Define KPIs?
Defining small business KPIs means considering the factors that impact you the most.
Start by coming up with a list of measurable and actionable business goals. For example, “becoming the most powerful retailer in the world” doesn’t cut it. A much more measurable and actionable goal would be “to enter the Fortune 500 by Q1 of 2022.”
If your business decides to enter the Fortune 500 by Q1 of 2022, you need to increase your revenue from a particular product by 20 percent. To achieve that, you need to gain 500 new customers. As such, your small business KPIs will relate to revenues, customer acquisition, and conversion rates.
In summing up what small business KPIs are, we can highlight four aspects:
- Actionable: Small business KPIs must relate to things you can change or improve.
- Measurable: KPIs must be quantifiable, well-defined, and easy to understand.
- Timely: The data reflected in your KPIs should be up to date.
- Impactful: KPIs should relate to the factors that have a meaningful impact on your bottom line.
If this all sounds like more hassle than your tax year prep – don’t worry! It’s not that bad.
How KPIs Change Between Businesses
When you dig deeper than fundamental KPIs like gross profit and customer satisfaction, you’ll find a lot of variety in the KPIs different businesses use.
A brick-and-mortar retailer, for example, will want to measure KPIs like this:
- Loss of inventory not due to sales, i.e. loss by theft.
- Sales per square meter, i.e. the store’s revenue compared with its rent expenditure
Meanwhile, a B2B eCommerce business will likely have KPIs like these:
- Cart abandonment rate. This means how many users leave their carts without completing a purchase.
- Website visitor conversion rate. For example, how many visitors become customers.
KPIs don’t only vary by business model or industry. Certain KPIs also become more important as your business matures over time.
For example, an IT company will experience a major drop in collaboration among IT teams if long-standing employees leave. A younger business, in contrast, might focus more on boosting awareness of its brand.
However, there is not a single set of KPIs that works for every business. But, there are some KPIs that almost every business should measure. Check out eight of the most crucial below.
1. Gross Profit
Every commercial business exists to create profit. If you’re not making a profit, then your business risks losing out and eventually going under.
In order to calculate gross profit, you’ll need to know how much you earn and how much your goods cost to sell.
Let’s say you sell time management tools. On average, you sell 1,000 user licenses per month. You sell each license for $50. Each one costs $25 to deliver. So, your monthly revenue is 1,000 times $50, which makes $50,000.
Your costs are 1,000 times $25, which makes $25,000. $50,000 – $25,000 gives you $25,000, which is your gross profit.
This is pretty simple. But imagine there’s a disruption in the IT services you rely on to deliver your software. Or your competitors start selling their rival product for less. When you know your gross profit margin, you can figure out how to respond.
2. Cash Flow Forecast
This small business KPI is a measure of how much profit you expect to make within a given period.
The figures you’ll need to take into account are:
- Cash inflows. How much you’ll earn in the given period.
- Cash outflows. The costs of selling your product or service.
- Net cash flow. How much you plan to gain overall (inflow minus outflow).
- Opening balance. The funds your business has at the start of the period.
- Closing balance. The funds your business will have at the end of the period.
Based on these figures, you can determine whether your business needs to access more funds. For example, consider a loan or overdraft.
3. Website Traffic
Your business likely has a website. As such, it’s important to know whether this cornerstone of your marketing is working well. That is as simple as adding a tracking tool like Google Analytics to your website.
Over time, website analytics will tell you whether there are any spikes or dips in traffic. You will also learn which pages are getting the most attention.
4. Social Media Engagement
Similar to website traffic, measuring social media engagement will reveal more about your customers. You will learn where they come from and what they respond to. This is easy to do through the in-built analytics in platforms like Facebook, Twitter, and LinkedIn. You can even do A/B testing on social media to determine which messaging your audience responds to best.
For example, let’s say you have a LinkedIn post titled “Conference Meetings: Everything You Need to Know About Conference Calls”. You could try posting the same content again with a different title “What the #$@&%*! Is a Conference Meeting?” Then, measure which performs better.
5. Employee Retention
Working to retain existing employees is one of the best investments you can make. Look at employee retention KPIs to understand whether your retention strategy is working or not.
If your employee retention rate is decreasing, that may indicate a need to take action to improve employee satisfaction. To drill down further into the reasons for employee retention, you might want to look at wellbeing KPIs.
Here’s an example employee retention calculation:
At the start of the year, you had 40 employees.
At the end of the year, 32 of those same employees were working for you.
(32 / 40) * 100 = an 80% annual retention rate.
6. Relative Market Share
While the other KPIs listed here are internal, this one measures your business in relation to competitors. Profit can seem like the most important factor in your success, but this should be contextualized within the market as a whole.
Let’s say you’re selling a substitute for Slack. You know your profit increased by 10% over the last year. How much did Slack’s profit increase in the same period? Are you taking ground from Slack, or is it just that the market is expanding?
7. Customer Satisfaction
Business gurus often cite the Pareto or “80/20” rule. This says that 80% of your business comes from 20% of your customers. While this may not be accurate for every business, it’s true that cultivating a loyal customer base pays off. In order to achieve this, you’ll need to measure customer satisfaction.
One way to do this is through customer surveys. You can ask customers to rate their satisfaction on a numerical scale. Or, if your customer interactions rely on outbound calls, you could check your call center analytics to see how many customers stay on the line.
8. Conversion Rate
Conversion rate refers to the number of people you interact with who go on to become your customers. Exactly what conversion means depends on your business model.
Let’s say your business sells a range of top project management tools. You pitch to 20 prospects per month. If you sign deals with four of those prospects, you have a conversion rate of 20%.
Or, if you operate an online store, you might have 20,000 visitors per month and 1,000 purchases. In that case, your conversion rate would be 5%.
This small business KPI is important for sales and marketing to understand the success of these efforts.
Put Small Business KPIs Into Action
Finally, let’s sum up the process of defining and implementing the right KPIs for your business.
- Set your business goals.
- Create a strategy to reach those goals.
- Break that strategy down into measurable components (KPIs).
- Collect and regularly analyze data for each KPI.
- Compare that analysis to what you’d planned in your strategy.
- Adjust your activities to stay on course for your goals.
If you haven’t added these steps to your small business resolutions for 2021, now’s the time!
Victorio Duran III is the Associate SEO Director at RingCentral, a global leader in collaboration and enterprise communication solutions. He has over 13 years of extensive involvement in web and digital operations with diverse experience as a web engineer, product manager, and digital marketing strategist.
Ready to incorporate or start a small business? MyCorporation can help! Give us a call at 877-692-6772 or visit us at mycorporation.com.