Keeping your business healthy and thriving involves tracking some key metrics to guide your decision making. Often business owners get stuck in the day-to-day operations and neglect making time to review finances, analyze reports and set goals. Plus we all know how fun looking at numbers can be, right?! So today we are covering the top 5 Key Performance Indicators (or KPIs) you need to track for success.
This is all the revenue coming into your business. Knowing your monthly, quarterly and annual sales will help you see if people are buying your product/service, your marketing is paying off and what your trends are.
Using your point of sale, membership or sales software simply run a monthly sales report to track this metric. It’s also a good idea to compare it to the previous month and the same month from the previous year. Remember to note any changes in the market, your marketing efforts, etc. to keep this metric in perspective.
Since the point of running your business is to make money, you need to know your net profit. This is simply revenue (aka sales) minus expenses.
While profit doesn’t always go up and in the beginning you might not be profitable at all, you still want to keep an eye on this metric. By running a Profit and Loss statement at the end of each month you can quickly check your net profit and get a snapshot of your earnings.
Net & Gross Profit Margins
Your net profit margin measures how profitable your business is. This number will show you how much money of every $1 that comes into your business you keep. To learn more about if you have a “good” profit margin check out “What is a good profit margin?”.
Net Profit Margin = Net profit / total revenue
Knowing your gross profit margin is also valuable, especially if you have a product business.
Gross Margin = (total sales revenue – cost of goods sold) / total sales revenue
Lifetime Value of a Customer
This metric tells you how much a customer is worth and helps you decide on how much money to spend on sales & marketing costs. This isn’t the easiest metric to figure out for all business, but essentially you want to capture the average amount a customer spends with you. If your average sale per customer is $50, you want to spend less than that to acquire them.
This is how many prospects turn into customers. Depending on the type of business you run there are various ways to get this metric.
If you run an ecommerce business, you can take the number of purchases made in a month divided by the number of unique visitors on your site.
For a membership based business, you could take the number of introductory sessions conducted divided by the number of membership sign-ups.
Knowing your conversion rate will help you see the effectiveness of your sales and marketing efforts. It can also help you see the kinks in your sales funnel and where to shift your attention to boost sales.
Staying on track
These are the five metrics every business owner should track regardless of industry to ensure you are moving in the right direction and making the adjustments needed to succeed. Along with these KPI’s, there are others you may want to consider tracking based on your business type. Check out the article “12 Business Metrics That Every Company Should Know” and “Track These Key Performance Indicators (KPIs) for Your Small Business” to get more ideas on essential metrics to track and review.
If you need help figuring any of this out, don’t hesitate to reach out. You can book a session with one of our business advisors for assistance on mastering KPIs.