Sales.
Sales
As a small business owner, it’s easy to get tunnel vision and tie your success to sales. After all, sales are the lifeblood of your business. But don’t let that singular focus distract from the bigger picture: sales are only one part of a much larger story. There’s a lot you can learn from your data—if you know how to look for it.
Now that we’ve talked about why it’s important to track KPIs, let’s talk about some of the most important ones for small businesses. You can track them all or pick specific ones based on what makes most sense for your goals and objectives. And you can use this list as inspiration to come up with some custom KPIs that are unique to your business.
Profitability.
Profitability.
A measurement of the amount of profit a company produces. Profitability metrics measure how well a company can generate profits from its revenues. These indicators are key for measuring the financial health of your business, so keep an eye on them as you grow and compare them to industry benchmarks to gauge performance.
Cash flow.
Your cash flow is the money that comes in and out of your business. Unlike profitability, which represents the total amount of income minus expenses over a given period, cash flow measures how much actual money your business has at any one time. It’s important because it’s what allows you to cover your operating expenses, such as rent and payroll. Your cash flow can be affected by sales—if you don’t send invoices to customers, or don’t keep track of when they pay you, that can hurt your ability to make ends meet. Your cash flow is also affected by accounts payable—if suppliers aren’t giving you credit terms for purchases or aren’t letting you pay them late without penalty, that can cause problems too.
Liquidity.
Liquidity is an important gauge of your company’s ability to meet its short-term obligations. It measures how well you can pay off those obligations without having to sell off major assets or take on additional debt. In other words, it’s a metric that tells you whether your company has enough cash on hand to keep the lights on in the near term.
It’s important not to confuse liquidity with solvency, which is a measurement of your company’s long-term sustainability as a whole. Solvency indicators include net worth and profitability ratios—for instance, the return on assets ratio is one measure of whether your company is making money relative to its overall size (assets). Liquidity ratios indicate what kind of shape your finances are in right now.
The current ratio gives you an idea of where your business stands in terms of liquidity. To calculate this metric, divide current assets by current liabilities—the final number will indicate just how much liquid cash you have in relation to what you owe over the next year or so (current refers to assets and debts that will be paid off within 12 months). A current ratio of 1 means that there are no additional liquid funds available beyond what’s required for covering immediate debts; if the number is higher than 1, it means that additional funds are available for other purposes and can serve as a safeguard if debt payments become more difficult later on.
Inventory turn.
Inventory turn is a key indicator of how efficiently you’re managing your stock. The higher the inventory turn, the more efficient your business is when it comes to selling your product. Inventory turn takes into account:
- How fast you can get stock in
- How much time goes by between when you receive a good and when the customer buys it
- How long it takes for your customers to pay you
While each of these factors may seem out of your control, there are specific ways that small businesses can improve their inventory turns. Here are some ideas:
- Get to know which products sell faster and which ones sell slower, so you can adjust orders accordingly. If a product tends not to sell quickly, order less and keep less on hand at once. If a product sells quickly, consider ordering more; just make sure that you will be able to sell all of what you order
- Keep an eye on seasonality (for example, if your business sells boots, prepare for big orders in winter). That way, if slow times are coming up after the busy season, you will have fewer unsold items lying around.
Receivables collection period.
The formula to calculate the receivables collection period is:
Receivables Collection Period = [(Accounts Receivable + Sales) / Sales] x 365 days
This percentage can be used to determine how long it’s taking your customers to pay for their purchases and see if that amount of time has increased or decreased over time. You may have noticed a trend of customers taking longer to pay their bills, which in turn affects your cash flow. By asking yourself questions like, “Why is this happening?” and “How can I fix it?”, you’ll begin figuring out solutions for your business and improving your cash flow.
Payables payment period.
Measuring your payables payment period is a must for all small businesses, especially those with suppliers or vendors. Payables payment period is the number of days it takes for your company to pay off its obligations to its suppliers, vendors and other creditors. This metric is important because it tells you how long it takes for your company to settle its bills.
Keeping track of this metric shows you whether or not you’re up-to-date on payments. It also gives an accurate sense of the level of creditworthiness that will be extended to you by vendors when you need supplies, which could possibly save you thousands over time if they decide to extend more favorable terms in exchange for prompt payments.
Customer acquisition cost (CAC).
Customer acquisition cost (CAC) refers to the total amount of money spent on sales and marketing efforts to attain a new customer. CAC is calculated by dividing the sum of all sales and marketing costs by the number of new customers acquired. Most businesses measure this expense as they build out their sales funnel, but it’s important to have it in mind throughout your entire customer acquisition process.
Knowing how much you’re spending to acquire a new customer helps you know whether or not your business is profitable. It also helps you manage resources—say, if it’s going to cost too much to acquire customers through online advertising, then you can shift tactics and focus on other marketing channels that will be more successful for your company.
Customer lifetime value (LTV).
- What is customer lifetime value (LTV)?
- How to calculate LTV
- Importance of knowing LTV
- How LTV impacts business decisions
- How LTV is used in marketing, sales, and product development
Days sales outstanding (DSO).
Days sales outstanding (DSO) measures the average number of days it takes for a business to collect payment after a sale has been made. DSO is a popular metric for gauging the efficiency of your accounts receivable and credit management processes, providing insight into how long it takes you to collect cash from customers.
DSO is calculated by dividing total accounts receivables (what you are owed) by total credit sales for a period, then multiplying by the number of days in that period. Here’s what that looks like:
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With the right KPIs, you’ll be able to make better business decisions based on hard data and avoid making money mistakes, which will help you boost your bottom line.
While the exact KPIs you track should be based on your goals, there are some that are typically worth measuring. If you’ve never tracked KPIs before, a good starting point is to collect data on the following:
- Sales, revenue, and profits
- How many people buy from you (number of customers)
- The average number of items people buy each time they visit your store or website (items sold per transaction)
- The average amount people spend each time they visit your store or website (average transaction value)
- Customer acquisition costs compared with customer lifetime value
KPIs can give you a good idea of how well your company’s growth strategies are working. Ultimately, tracking these key performance indicators can help you identify issues and opportunities for improvement so that you can make better business decisions, avoid wasting money on unprofitable activities and boost your bottom line.