As a small business, you may be looking for tangible ways to track your progress and look for room to grow. That's where Key Performnace Indicators come in. KPIs are an integral building block for small businesses that want to fully understand their full potential and create meaningful goals that help them grow.
Staying on top of your bookkeeping and tracking revenue is key to growth but if you aren't currently tracking KPIs, it will be much more difficult to grow in the right direction. To set you and your team up for success, you’ll need to create measurable goals to take your business to the next level.
With the right advice and tools, you can set yourself up to track KPIs in real-time and be able to make the right business decisions based on data-driven growth metrics.
What are Key Performance Indicators (KPIs)?
KPIs are business metrics that measure quantifiable data for a specific objective during a predetermined time period. These metrics can help you measure your progress and determine growth opportunities.
These key metrics are the outcomes that help you understand where you can grow, what you are doing well, and where you are going. We recommend small businesses having at least 3-4 KPIs at any given time that are all designed to align with a different department or business goal.
From there, these predetermined goals add structure to your business strategies and show you where you can improve, revise and restructure your current tactics to be more effective.
Understanding Key Performance Indicators (KPIs)
While there are general KPIs that every business should be tracking. Every business is unique and so it should track unique KPIs too. Think of KPIs as the measurements of your business data that help you understand how close you are to your goals. When setting out to create goals for your small business, there are a few things you’ll want to keep in mind to ensure you are utilizing the right growth KPIs to track your success.
To create successful goals, you can follow the SMART goal structure:
Specific: What are you hoping to accomplish?
Measurable: How will you know if you succeeded or not? Are they easily measurable?
Achievable: Are your goals realistic and are they reachable?
Relevant: Is this data worthwhile? What will you get from it?
Time-Framed: Are you looking at month-over-month, year-over-year, or quarter-over-quarter? When do you want to achieve your goals?
Once you have the framework for your goals, you can then structure your KPIs around what type of data you want to monitor that would be beneficial for your small business.
Why Small Businesses Need to Track Key Performance Indicators (KPIs)
When it comes to running a small business, there are tons of opportunities for growth and scaling. You just need to set out to find them.
Here are just a few reasons that KPIs are essential to any small business:
Track your progress and make adjustments
The only way to know if what you’re doing is working is by reviewing data, creating goals for yourself, and always looking for new opportunities to grow your current strategy. KPIs provide a framework understanding that allows us to track this data through a specific time period.
Finding low-cost strategies to grow your business aka Growth Hacking
If you're looking to find low-cost growth strategies to help you reach your goals, KPIs can help you find the best way to increase revenue, retention, referrals, and everything in between.
Discover scaling opportunities
Analyzing data and metrics can also help you find valuable scaling opportunities. Before you jump the gun and start to hire or expand, you need to know where you currently stand and where to start.
How Small Businesses Can Use Key Performance Indicators (KPIs)
Business owners always want to see growth metrics and data that can help drive business and scale the company in the future. When choosing which type of KPIs are best suited for your business, you'll want to keep in mind that every business plan and structure is different. You’ll want to adjust your KPIs to fit your small business’s unique needs.
Gross profit margin
Your gross profit margin is how much is left over when you subtract Cost of Goods Sold from Net Sales. Put another way, it’s calculated by subtracting the cost of the product from your total revenue. Gross Profit Margin doesn’t account for overhead it helps you understand if your sales are profitable. This is an essential KPI if your overall goal is to grow your business and move in a more profitable direction.
Gross Profit Margin = Net Sales - Cost of Goods Sold
Cash flow forecast
Arguably one of the most important KPIs small businesses should prioritize, cash flow forecast helps companies predict cash inflows so they can be prepared to meet their obligations. With the right accounting firm on your side, you can build models to use historical data to forecast cashflow. The most simple calculation for cash flow is:
Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash.
Net profit
It takes a long time to start seeing a profit. Only 40% of America's small businesses are currently profitable. Ensuring you have a net profit and not a net loss is essential to the health of your business. Your net profit is your total revenue minus your total expenses. You can choose to measure this KPI month-over-month, quarter-over-quarter or year-over-year.
Net Profit = Total Revenue - Total Expenses
Debt ratio
Businesses of all sizes carry some type of debt and that's okay. However, you may want to keep an eye on it to ensure it's not unmanageable. With a low debt ratio, your company has more access to financing opportunities for growth and scaling. A clean balance sheet comes in handy when calculating Debt Ratio.
Debt Ratio = Total Debts \ Total Assets
Revenue growth rate
This KPI refers to the business’s income and sales. To find your revenue growth rate, you’ll want to take your company’s total revenue for the year. Then, divide your income for the year by the total revenue you made last year. Then, you’ll know if your growth has increased or decreased in the new year.
(%) Revenue Growth Rate = [ ($) Revenue Month B - ($) Revenue Month A ] / ($) Revenue Month A X 100
The Importance of Bookkeeping
If you’re hoping to grow your small business, then ensuring your bookkeeping is accurate should be a top priority. Since bookkeeping deals with the financial aspect of every transaction and purchase made, it can provide you with meaningful insight into what your company is doing right or wrong. It also makes it possible to calculate KPIs easily and efficiently.
Finding the right advisor to help you with your bookkeeping can help you plan, track and strategize KPIs. Advisors can help you find valuable data that you need to stay on top of from your small business bookkeeping. If you want to enhance what you know about Quickbooks or Xero, we strongly encourage you to reach out to the team at ExFi. At Extensure Financial Inc, we pride ourselves in helping small to large businesses meet and track their financial goals.
What's Next?
KPIs are a building block to growing and scaling your business in a positive direction. As you navigate through the data and learn more about your clients, never be afraid to reach out to the team at LedgerFi. Our team of highly trained advisors is ready to help you navigate through Quickbooks or Xero, choose the KPIs for your business and successfully work them into your business strategy.
