Key Performance Indicators (KPIs) are important to understand how your business is progressing. It can help businesses create the right strategy according to their scenario and goals.
As a small business owner, you must consider several KPIs to understand the true performance of your business.
Here are the major KPIs every small business owner must track:
1. Gross Profit
The aim of most businesses is to make money, which is generally measured in terms of net or gross profit.
Profit is defined as the difference between your revenue and your expenses. If it’s negative or is lower than expected then it means you need to change your strategy and reduce your expenses and/or find ways to make more sales.
This KPI can help you understand how far you are from achieving your goal in terms of profit. If your business is making a profit at a good rate then it means your current strategy is working and you should stick to it. However, if your business is not making a profit or if the profit isn’t growing then you might have to change a few things.
Most bookkeeping software can do it for you.
The formula is simple: Gross Profit(x)100/Sales
2. Inventory Gross
This KPI only applies to businesses that offer physical products.
It can help you figure out how much of a product you have in the warehouse. This information can help a business understand how much to produce based on the demand for a specific product.
Paying attention to this KPI ensures you don’t end up overproducing, which can result in a loss. Moreover, based on this KPI, you can decide what method to use – FIFO, LIFO, etc.
3. Cash Flow
This KPI refers to the amount of money that flows in and out of a business.
Having a clear understanding of cash flow is important to know exactly how much a business can afford to spend and if they have the means to pay bills if things go south in the future.
Since a lot of businesses run on credit, things can often go messy. A clear understanding of this KPI will help you ensure your margins and sales are appropriate.
You’ll need a proper understanding of your monthly and weekly sales estimates to be able to build a reliable cash flow forecast.
4. Income By Source
The source can be anything, an individual customer, a business directory such as Brobia, or a specific store location.
Every customer comes with a lifetime worth. It’s important for a business to identify ‘good’ customers so they can spend more time on them.
In addition to this, there are several other KPIs like accounts payable, accounts receivable that can help you understand where your business stands.
Tracking KPIs can help you measure your company’s success so you can evaluate your progress and set attainable goals. Start with these KPIs we mentioned above and your business will be on track for success!