As a small business owner, some days might feel more successful than others. As the owner and CEO of an accounting and payroll software company, I have experienced this first-hand. But, do you use quantifiable data to record your progress? If not, apply your most important KPIs (key performance indicators) to your business practices. KPIs are measurements you use to track how effectively your company meets its most important goals.
Defining your goals
Measurable information reveals if you met your goals, or if you missed your mark. When you track meaningful KPIs, you don’t have to guess if your decisions help or harm your company. The numbers you record and analyze reflect your progress.
The key to deciding which numbers to pay attention to starts with defining your goals. For example, you might set a goal to make a certain amount of sales in the next three months. Or, you may want to grow your customer base by a certain percentage.
Once you have your specific goals in mind, you can develop a KPIs reporting plan. You won’t find a one-size-fits-all set of KPI metrics for small businesses. Instead, you can look at data that relates to the goals you want to achieve.
One of the most important KPIs to start tracking is your revenue. To most small business owners, this probably makes sense. The more revenue you bring in, the more successful you appear. Accounting software for small business is a good starting point for tracking revenue.
But, pay attention to more than just your revenue. Revenue alone doesn’t show you the whole picture of your financial health. If you don’t know how to organize your business finances on other fronts, they could drag your organization down.
Let’s say you had above average sales this month. Your revenue reflects a successful company. But, you owe vendors twice as much as what you made. Even though your revenue shows progress, you are under your bottom line because of your expenses.
Using the most important KPIs for your business
You can use any combination of KPIs to measure your business’s progress. Decide which variables correlate with your goals. To get started, here are three important KPIs you might try for your small business:
1. Cost of goods sold (COGS)
Track your cost of goods sold (COGS) to check that your method for how to price a product is pushing your business forward. The cost of goods sold includes expenses directly related to making a product or providing a service. COGS might include raw materials and direct labor costs.
Make sure you do not price your products or services lower than your COGS. If you do, you lose money each time you make a sale. If the COGS is higher than your prices, raise your prices or reduce spending on COGS.
2. Days sales outstanding (DSO)
Days sales outstanding (DSO) measures the number of days you take to collect money after invoicing a customer. The days in between making a sale and collecting a payment affect your cash flow. The bigger the DSO, the more your projected cash flow decreases. Use DSO to make sure your cash flow isn’t getting held up by slow collections.
If you spend money faster than you bring it in, you should lower your average DSO. You could lower your DSO by shortening customer payment deadlines and enforcing late fees.
3. Customer retention
Your target market is the group of customers you aim to attract to your business. The more you know about your target market, the easier it may be to attract and retain customers. To learn more about your target market, consider how to conduct a market analysis for your industry. A market analysis can show you your customers’ needs, interests, and demographics.
To use customer retention as a KPI, find out how many of your customers are new or returning. The number of customers that come as referrals is also helpful. Retention is reliant on how satisfied customers are with your business. You can track information on customer satisfaction through gathering reviews and feedback.