Discover for yourself whether you’re tracking the three most important KPIs. And if not, learn how to start doing so.
The only way for a business owner to know if their company is meeting its goals is to define and track key performance indicators. However, the first part may be trickier than the second.
How do you even come up with the right KPIs to track? Know that there are two groups of KPIs that every business should track, which are industry-specific KPIs and universal KPIs. This article is about universal KPIs that are essential for every business.
(1) Profit Margins
The gross profit margin is one of the most critical KPIs. After all, the profit motive drives most businesses since if there’s no profit, there’s no business. But some companies make the mistake of spending way more than they earn. While this is okay in some stages of a business, it can spell troubles in the long run.
That’s why it’s important to keep an eye on your gross profit margin. Here’s how to calculate it: Divide the gross profit by gross sales. The number you get is the fractional profit margin, which you can multiply by 100 to express in percentage.
If your profit margin is going up, that’s great! But if it’s lower compared to the same quarter of last year, maybe it’s time to make a change. It’s worthwhile getting to know average margins in your industry/sector so that you can guage your business performance against competitors.
There are two ways to increase your company’s profit margin, and they have to do with the gross profit formula: sales minus cost of goods sold (COGS). So you can either decrease COGS or increase sales (at constant or a smaller increase in COGS).
You can accomplish the former by cutting costs and saving money on suppliers, availaing of buying discounts, stock/waste manegement and such. As for the latter, you can improve your products or services so you can raise prices.
(2) Revenue Growth
How can you tell if your business is going in the right direction? Your revenue ratio is a good way to measure your company’s growth in a particular period.
The revenue ratio is the ratio of the current period’s revenue compared to the same period of the year before. It shows how fast your revenue is growing, and the best way to increase this ratio is to increase sales or revenue. The figure is expressed as a percentage.
The higher it is, the faster your company’s revenue growth. Bear in mind business specific factors during the year that will affect your growth, and general economic factors too. All such factors can affect revenue growth, but the main thrust should come from your own activities on marketing, sales, pricing, upselling etc.
(3) Conversion Rate
The Internet has enabled business owners to track conversion rates more precisely than ever. If you’re spending money on ads, for example, it’s essential to find out which ads work and which ones do not.
It’s also possible to calculate the conversion rate for anything, not just paid ads. It could be the percentage of people who clicked on your link or bought your product, for instance. To do so, calculate the conversion rate by dividing the number of conversions by the total number of leads (those who saw your ad, for example).
Conversion rates give powerful insights and they can help optimise or fix things. If your conversion rate is low, look at your marketing strategy, your sales process, your onboarding, your brand, your communication style etc.
(4) Average Order Value
Average Order Value (AOV) is a crucial Key Performance Indicator (KPI) for small businesses. It represents the average amount a customer spends per transaction. Calculated by dividing the total revenue generated by the number of orders, AOV provides valuable insights into your business’s sales performance. A higher AOV indicates that customers are purchasing more or higher-priced items, which can boost profitability.
Tracking AOV over time helps you assess the effectiveness of marketing strategies, pricing strategies, and upselling efforts. It also aids in identifying opportunities to increase revenue by encouraging customers to spend more during each visit, ultimately contributing to sustainable growth and improved bottom-line results.
The most critical KPIs may depend on your business.The four KPI’s can apply to most small and family businesses, so get familiar with the metrics – how to calculate them, what they mean and how to take action to change them for the better!
Get some technology and processes in place to track these KPI’s, and work with your advisor throughout the year to check-in on your progress.