Are You Watching These 5 Critical Business Metrics?
What are some of the most important metrics of success? Here's a surprise: The number of happy customer reviews you have is probably not one of them — though they certainly help. You need to track the same kind solid information that large firms use to make smarter business decisions — or spot problems before they wreak havoc on your operations.
Key performance indicators (KPIs) are metrics that provide actionable insights. To clarify, no one set of KPIs works for every business, thought these five are a great foundation. They'll help you understand the health of your business. From there, you can decide which other KPIs will help you gain more insight into your business and how it really stands.
1. Total revenue
Sounds like a no-brainer, right? But this number reflects more than just your sales transactions. Some businesses use "cash basis" accounting, which means they count only the funds they've actually received, versus including accounts receivable. Other firms also draw income from investments or interest.
2. Gross profit margin
How much money does your business make after you've accounted for what it costs you to produce what you're selling? Yes, you could simply subtract the cost of goods and services (COGS) from your total revenue to determine your gross profit margin. But the most effective means of tracking your gross profit margin is to calculate the percentage relationship between total revenue and COGS: First divide the gross profit by revenue, then multiply the result by 100. The higher the percentage, the higher the revenue and the lower the costs. By doing this, you'll get a consistent KPI regardless of how much the actual numbers fluctuate.
3. Operating profit margin
This metric is more comprehensive than gross profit margin because it factors in not only COGS but all of your overhead — employee wages, rent, advertising costs, even your electric bill. These are commonly referred to as "selling, general, and administrative expenses," or SG&A.
Take the total of all those overhead costs and subtract them from your net sales — what you bring in after accounting for returns. Multiply the result by 100 for a percentage that reflects your sales efficiency. The higher the percentage, the more efficiently you're managing your business.
4. Net profit
Funny how many ways exist to slice and dice expenses, isn't it? This is the most inclusive metric when it comes to defining expenses: COGS + SG&A + taxes and debt payments come out of revenue to show you the true bottom line — literally.
5. Revenue growth rate
"How well is my business growing?" To get the answer, first settle on a consistent timeframe to track and compare. Annually isn't frequent enough to make adjustments, whereas weekly, monthly or quarterly make more sense.
Subtract the revenue for the current period from the revenue for the previous period and divide the difference by the revenue for the previous period, then multiply by 100. Again, the higher the percentage, the better. Growth-focused startups love this KPI, but it's relevant for any business that wants to know its growth (or in some cases, stagnation) rate.
Now that you've learned about the most important KPIs to track as a small business, you can start to think strategically about other helpful metrics, including employee performance, customer satisfaction, strategy implementation, and cash flow.
When you find the most effective ways to quantify your business goals, you're discovering new and exciting ways to achieve your vision of a successful business.
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.
