As a small business owner, you have the power to decide what your priorities are. However, regardless of your goals for the company, there are certain KPIs that should be tracked in order to ensure success. These five KPIs will help give you an idea of how well your company is doing financially and if it's on track to meet its goals.
What Are KPIs?
KPIs are key performance indicators. This is a way for companies to measure the health of their business by evaluating certain factors, such as increased sales or a decrease in spending.
You can't track every single possible KPI under the sun - it's impossible. However, there are some universal KPIs that you need to keep an eye on regardless of your niche and business model.
The following five KPIs should be used by small businesses to track success. If you're looking into specific areas that your company could improve upon, these metrics can help you determine what to focus on.
Net profit is the amount of money your business makes after factoring out expenses and other costs. As a small business owner, you need to know whether or not your company is turning a healthy profit on its operations.
It's important to understand the difference between revenue and profit. Let's say your business turned over £100,000 last year. If you spent £40,000 then your net profit is £60,000.
However, if you turned over £120,000 but spent £80,000, you still keep £40,000 as profit. More revenue does not always equate to more profit, so it's important to keep an eye on this figure.
Net Profit Margin
Net profit margin is the percentage of net profits your company makes. This number represents how efficient you are with your finances and whether or not you're making a healthy amount on each sale. If this figure drops, it could be an indicator that there's an issue in terms of spending or that revenue increases need to be made.
Let's go back to the example above.
Again, let's say that you made £100,000 in revenue and spent £40,000. Your net profit is £60,000, giving you a profit margin of 60%.
Now let's imagine you made £120,000 in revenue and spent £60,000. Your net profit is still £60,000 but your profit margin has decreased to 50%.
Your net profit margin is a great indicator of how well you're spending and making money. It can also inform decision making around pricing and marketing.
The quick ratio is a number that represents how efficient your company's liquidity is. It tells you whether or not your business can meet its short-term financial obligations with the assets it currently has on hand.
In this sense, "quick" refers to liquid - i.e., money in checking accounts and easily convertible investments like stocks and bonds.
The Quick Ratio is calculated like this:
(Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities = Quick Ratio
A Quick Ratio of 1 or greater is good news for your business because it means you have enough assets available to cover your expenses and keep your company afloat. A number lower than 1 suggests that your business is struggling to meet its obligations and may need to borrow money or liquidate some assets.
The cash-to-debt ratio tells you how much liquidity a company has relative to its liabilities. It's another great indicator of whether or not your business can pay off any debts it might have.
To calculate your cash-to-debt ratio, divide the company's cash by its current liabilities:
Cash from Operations/Total Debt
This is how long it would take for your business to pay off its current liabilities if it used all of its cash in hand.
You should use your cash-to-debt ratio to help you figure out how much short-term and long-term debt your business can handle.
Cost of Customer Acquisition
As a small business owner, attracting new customers is no doubt one of your primary goals, but how much do you need to spend in order to do so?
The cost of customer acquisition is the amount you spend, on average, to get a new customer. You should use this metric to inform your sales process and marketing strategies because it can give you an idea of how much money you need in order to compensate for all costs associated with bringing customers on board.
The KPIs small business owners should be tracking to ensure financial success are: net profit, net profit margin, the quick ratio, cash-to-debt ratio, and cost of customer acquisition. These numbers can help you make more informed decisions about your business and to ensure that it's financially stable.