To truly know how well your business is doing, it is important to identify and monitor the right Key Performance Indicators (KPIs) for your business. If you aren't using these tools, you can’t fully measure how well any of your forecasts and strategic plans are working.
KPIs will give you additional tools to measure performance and be able to make timely adjustments in running your business. Regular tracking and monitoring of KPIs will help you reach your business goals, maximizing profitability and improving your business’s financial health.
Here are seven KPIs that every owner should consider when measuring the performance and profitability of their business:
1. Cash Flow
Cash is the lifeblood of a business. Cash flow tracks how much money is coming in and going out of the business. Ensuring a business is generating enough cash is important in meeting operating and other future cash needs.
It is important to track your cash flow on a regular basis. Doing so will allow you to make any needed adjustments to maintain your business’s financial health.
2. Customer Acquisition Cost (CAC)
Do you know how much it costs you to acquire a new customer?
Add up your expenses related to customer acquisition (i.e., your sales and marketing costs) for a given period and divide the total by the number of new customers you gained during that same period, and you have your Customer Acquisition Cost.
This metric is an excellent measure of the efficiency of your sales and marketing team in growing your customer base. The lower your customer acquisition cost, the better job you’re doing adding customers at reasonable expense.
3. Net Profit
This is the “bottom line,” and it’s as important an indicator as there is. After all, you’re in business to make money, and this is the KPI that tells you whether you’re doing so. Net profit is, of course, revenue minus expenses, and there’s little benefit in revenues going through the roof if there aren’t corresponding gains in net profit.
As with most KPIs, it’s important how it trends over time. Increasing net profit is one of the healthiest indicators a business can have.
4. Lifetime Value (LTV)
LTV, also known as CLV (customer lifetime value), is a measure that indicates the total monetary value a business can reasonably expect to receive from a single customer during the business relationship. Successful businesses that gain customer loyalty have a high LTV.
In a way, it’s a companion KPI to CAC. CAC tells you what it costs to gain a customer, and LTV measures how much they’re worth once you acquire them. It costs money to find new customers, so it’s important to make the relationship as profitable as possible.
5. Accounts Receivable Turnover Ratio
The Accounts Receivable (AR) Turnover Ratio is another important metric for a business. By calculating this ratio, you can track the rate at which your customers are making their payments, allowing you to have greater insight as to timing of monies coming into the business.
This ratio is calculated by dividing net credit sales for a given period by the average accounts receivable for the same period. It measures how efficiently a business collects on its receivable and shows the amount of credit being extended to its customers.
A high AR turnover ratio is desirable and will show a healthy cash flow into the business; lower AR turnover means you are extending customers more credit or time to pay than you may want. Changing payment terms may be helpful to improving your ratio and cash flow.
6. Revenue Per Employee
To generate this KPI, divide your revenue by your total number of employees. This measure allows you to determine approximately how much money each employee makes for the business. The higher the number, the more efficient and productive your staff is.
This number is especially useful when you compare your revenue per employee against other businesses, but be sure to evaluate this KPI against the benchmark for your particular industry. Some businesses are more labor intensive than others, so the target for this KPI will vary from industry to industry.
7. Gross Revenue
Gross revenue is a measure of your total sales. It is important to track this metric over time, allowing you to make appropriate operational decisions in order to maintain your business’s profitability.
If Gross Revenue is increasing, it is important to check that your margins are on target. This will help you evaluate whether you can continue to handle the increase with your existing employees, or you need to hire or step-up production to meet the increasing demand.
If Gross revenue is shrinking, look at whether the decrease is temporary or the future trend for the business. Determine what adjustments need to be made to align with this decrease. If temporary, can you maintain the business’s current cost structure for the near-term future or do expenses need to be immediately reduced? What other shifts need to be made to align with lower revenues?
Ready to Maximize Your Business’s Performance?
The seven metrics shown are only a few of the many KPIs on which a business can choose to focus. Choosing the one that makes sense for your business goals is important. In addition, putting processes in place to be able to calculate and monitor the KPIs on a regular basis will increase their value in getting a business to reach its goals.
Our team at SIMPLY Financials PLUS can help you select the right metrics for your business and work with you to gather the data needed to calculate your KPIs and obtain meaningful results that you can use to make the best decisions to enhance your business’s performance.
Give us a call and we will help you identify what is truly critical to your business’s success, so you can focus on what matters most: running and growing your business.