10 important KPIs small businesses should consider tracking
It’s the year 1911. In Boston, shovels begin breaking ground on what will eventually become the home of the Red Sox. Down the coast, Orville Wright sets a flight record that will stand for a decade. Meanwhile, Henry Ford studies up on a new automaker, poised to give his prized Model T a run for its money. It’s a feisty little upstart named Chevrolet.
And nationwide, readers pick up the latest copy of The American Magazine, opening its pages to find one of the most influential ideas of the twentieth century. Frederick Winslow Taylor’s series, The Principles of Scientific Management, appeared as installments in three editions. And the idea that work can be made more efficient through study and data was born.
Just like Fenway, flying and fast cars, Taylor’s ideas survived, thrived and are an integral part of everyday, modern life. It’s almost hard to imagine running and growing a business without some sort of data and measurement. But as time goes on and more information becomes available, the cure can feel like a curse. Having to sort through mountains of stuff, determining what’s important and what’s not, can seem like an impossible task.
It’s tempting to let that frustration get the best of you and return to the old way of doing things – maybe run a couple of reports and let old-fashioned intuition decide the rest. But before you do, read on. We’ll bring scientific management into focus for you and cover which strategic KPIs can help small business owners:
Identify and correct operational inefficiency
Cost-effectively manage inventory
Drive customer satisfaction, retention and engagement
What are key performance indicators (KPIs)?
Simply put: A KPI is a way to categorize the success of your business based on the activities you undertake. For example, if you buy an ad to drive visitors to your site, website traffic is the KPI you would use to measure the effectiveness of that ad. Ideally, any action you take that requires a significant investment of time or money should have a specific KPI attached to it. That way, you can track performance and make cost-effective decisions going forward.
KPIs are perhaps the most important data points within a small business’ analytics. They reveal a story about your business’ performance. Analytics can include numerical data, like sales revenue or profit margin, and anecdotal data, like customer reviews or employee survey feedback. Big data doesn’t just belong to big business. It’s important that your small business leverages KPIs to make more strategic decisions too.
There are two main types of KPIs: lagging indicators and leading indicators.
These are insights you get from looking back at quantifiable measurements and business goals like gross profit margin, website traffic and conversion rate – anything previously reported to track progress.
These insights are used to measure predicted outcomes and usually shift over any given time frame – think less concrete strategic objectives like customer satisfaction, employee satisfaction, projected revenue growth and brand recognition initiatives.
How KPIs help your business thrive
Some data collection, metrics and analytics are required to operate a business and create strategic goals. For example, knowing your annual revenue is an important part of tax prep. But complying with regulations isn’t the only way data can benefit your business. Analytics help you:
Learn how your business’ performance measures up, identifying strengths and weaknesses
Make real-time, data-driven decisions and capitalize off of emerging trends
Find and optimize inefficient processes and reduce costs
Gain insight into customer behavior and preferences so you can offer personalization
Set goals for growth and hold yourself and your teams accountable along the way
Let’s break down some of the most important KPIs small business owners can set and industry benchmarks that can help you get started. Before you continue, an important note: No single data point or KPI we cover should be considered in isolation. It’s important to always rely on multiple measurements to inform a single conclusion.
Important analytics and benchmarks for small businesses
As you’re well aware, there are a lot of good KPIs you can measure depending on your business and industry. So we won’t cover them all here. But we will highlight the core, crucial KPIs your business can use to measure progress, optimize cash flow and more.
Revenue measures the total amount of money a business generates from sales of its products or services. We can’t provide a specific number to act as a benchmark, because the answer is completely dependent on the individual business. But here’s a good rule of thumb. Set a revenue goal that covers expenses enough to generate a profit. Understanding your business’ total costs — including any re-investments into products, staff or research — can help you set a revenue goal that sustains your business.
It’s also the basis from which other KPIs should be considered, and serves as a guidepost for almost all of your decision-making.
2. Gross and net profit margin (GPM and NPM)
GPM is the percentage of revenue a business retains after deducting the cost of goods sold (COGS). NPM is the percentage of revenue that remains after all expenses have been deducted. They reveal the financial health and profitability of your business, including whether your prices are too low and/or your costs are too high — particularly in comparison to your competitors.
In general, a GPM of 50% and an NPM of 10-20% are considered good for most small businesses. (Start-ups have lower benchmarks for both KPIs.) But your actual target will depend on your specific industry. For example, a GPM of 24% in general retail would be considered healthy, while the same percentage in banking would be a cause for alarm. You can see a list of GPM and NPM benchmarks by industry here.
3. Account receivable (A/R) turnover
This KPI describes the number of times per year that the business collects the money it’s owed from customers. A higher A/R shows that you’re able to collect payment from your customers quickly and efficiently while improving cash flow.
A good ratio for most small businesses is around 6-8 times per year. This translates into receiving payments from customers every 45-60 days on average, which can keep your cash flow healthy. But like most of these KPIs, the ideal ratio for your business will depend on your specific industry and the typical payment terms within that industry.
4. Debt-to-equity (D/E) ratio
This measures a business’ leverage by dividing total debt by total equity. A lower debt-to-equity ratio indicates that the business is less reliant on debt financing and has a stronger financial position.
A D/E ratio of 2 means the company borrows twice as much as it owns. A D/E of 2 or lower is considered healthy for most small businesses. Anything above that may mean a business is taking on too much debt, which can increase financial risk and make it more difficult to obtain funding in the future. On the other hand, a ratio that’s too low may indicate a business is not taking advantage of all available financing opportunities to grow and expand.
Again, the number you choose will depend on your industry and individual business. To set specific goals for this KPI and others, consulting a financial professional is your best bet.
5. Inventory turnover
This measures how quickly a business sells its inventory, replaces it and ultimately, generates revenue. Generally, a higher inventory rate is better because it means the business is able to sell its inventory quickly and avoid excess stock.
For the most part, a good inventory turnover rate is around 4-6 times per year. Any lower than that, and it could mean a business is carrying too much inventory, which can tie up cash and lead to excess carrying costs. That could also leave their inventory at risk of becoming obsolete or out of date.
6. Customer acquisition cost (CAC)
CAC is the amount of money a business spends to acquire a new customer. It’s important because it helps businesses determine the profitability of their marketing campaigns and sales efforts. The ideal number here will depend on your customer lifetime value (CLV) number: the amount of money a customer will spend with you over the course of their relationship with your business.
Ideally, CAC should be less than CLV. For example, if your CLV is $500 and it costs you $100 to acquire a new customer through advertising or promotions, your business could expect $400 in profit over the lifetime of the customer. If CAC was $500, you would break even. But if CAC was $600, your business would lose money to secure that customer, and reconsidering your marketing team’s strategy and sales tactics could be an important next step.
Measuring customer satisfaction and engagement
We’ve covered a lot of financial KPIs that can help small businesses operate cost-efficiently and position their businesses for success. But tracking the dollars is just a piece of the puzzle. No matter what industry you’re in, customer service makes an impact on your bottom line. So how can you use KPIs, smart data and analytics to improve the customer experience and keep them coming back for more? Consider tracking:
7. Net promoter score (NPS)
This is a popular KPI that measures the likelihood your customers would recommend your business to others. It’s calculated by subtracting the percentage of detractors (customers who wouldn’t recommend your business) from the percentage of promoters (customers who would). A high NPS indicates that your customers are satisfied with your business and likely to speak favorably about it.
NPS creators Bain & Company say that anything above a zero is good, 20+ is great and 50+ is amazing.
8. Customer satisfaction score (CSAT)
This measures what NPS only hints at: just how satisfied customers are with your products or services. It’s usually measured using a survey question that asks customers to rate their satisfaction on a scale of 1-5 or 1-10. A high CSAT score indicates that your customers are happy with your business.
And you don’t need a marketing team for this one. You can incorporate the survey question into communications with your customers via email and even at the cash wrap.
9. Customer retention rate
Customer retention rate measures the percentage of customers who continue to use a business’ products or services over a given time frame. A high retention rate indicates that your customers are loyal and likely satisfied with their experiences.
To calculate your rate, select the period you want to measure — monthly or quarterly tend to be good starting places. Subtract the number of new customers you acquired during that period from the number of customers you had at the end of that period. Divide that number by the number of customers you had at the start of that period and multiply that by 100.
Naturally, the right number for your business depends on a number of factors. But a retention rate of 70% or higher is generally considered good for small businesses. A lower rate could be an indication that product quality or customer service is suffering.
10. Marketing metrics
As a baseline, consider measuring your website traffic and engagement through your social media channels. Traffic measures how many people visit your website, which can be an indication of how well-known your brand is and how many return visitors interact with your site. An easy way to measure your website traffic is by using a resource like Google Analytics. It not only helps you track traffic to your site, but the insights you gain can also help you make informed decisions and plan goals more efficiently. The best part? It’s free.
Depending on your industry and the size of your website, the right number for you may vary. That’s particularly true if you’re using marketing campaigns or sales techniques to promote your website. If you’re spending money to increase traffic, you should see larger numbers than you normally would.
Social media engagement measures how close or integrated your customers feel to your brand and is calculated by tracking various interactions – likes, comments, Retweets, shares and account mentions, to name a few. To calculate your engagement rate by reach, take the total number of post interactions, divide it by your reach (number of followers) and multiply by 100%. Naturally, a high level of engagement indicates that your customers feel connected to your business and are willing to review and recommend it to others.
Social engagement rates will also vary, depending on the platform you’re using and the number of times you post. Generally, good engagement rates are:
As we’ve said throughout this blog, these numbers are general benchmarks, and the number you end up choosing for your business depends on your industry, size and business model. But narrowing in on the right KPIs, analytics and data can provide the insights you need for data-driven decision-making.
Where do we go from here?
That was a lot of information, but knowing the ins and outs of metric tracking can help your small business grow in more ways than one. Now you can use these tools to boost your bottom line, build better customer experiences and increase efficiency.
Speaking of valuable information, The Entrepreneur’s Studio is a collection of resources, podcasts and community members devoted to helping small business owners thrive. If you’re looking for more actionable knowledge from people who’ve walked in your shoes, subscribe today.
Disclaimer: The information provided in this document does not, and is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Information provided may not constitute the most up-to-date legal or other information, and readers of this information should contact their attorney to obtain advice with respect to any particular legal matter, in the relevant jurisdiction. All liability with respect to actions taken or not taken based on the contents here are hereby expressly disclaimed.
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