Five Numbers Small Business Owners Should Know
September 17, 2012
KPIs, or key performance indicators, are the vital signs of a small business.
Big businesses are obsessed with KPIs, but even small businesses can benefit from monitoring these figures to provide a snapshot of how well the business is doing.
Think of them like the routine tests at the doctor. KPIs are like blood pressure, cholesterol and heart-rate tests that measure your business’s overall health and can also offer an early warning of an impending problem.
Here are five numbers that every entrepreneur should know:
Work out your current liabilities and your current assets, subtract the first from the second and that’s your working capital figure. If your working capital decreases then it could be a red flag that something’s going wrong, such as your sales are declining. If it increases then it’s still worth investigating as you might be sitting on too much inventory or your clients might not be paying you quickly enough, both of which could create problems down the line.
Track your sales in the past month, quarter and the year to date and compare those to your predictions in your business plan to see whether you’re on target. As your business develops you can also measure your sales pipeline: the sales you are currently negotiating as a fraction of your overall sales target. If this figure is over 2.5x then that is a good indicator that you will make your annual revenue target.
Take your gross revenues and subtract from that all your costs in making and delivering your products or services and you have your gross profit figure. Ideally, your revenues should be double your cost of production.
You can also calculate your profit margin by subtracting all your general expenses from your gross profit and dividing that by your sales. This will tell you how profitable your business is, by measuring how much of each dollar of sales your company keeps. This lets you know if your small business is on track: if your profits go up but your profit margin has gone down it means your costs are out of control.
Sales per employee
Divide your gross revenues by the number of staff you have and the resulting figure will tell you whether or not you are overstaffed. Sometimes entrepreneurs are too optimistic. The sales per employee figure will help you grow your small business with the right number of employees.
Customer acquisition cost
Work out your cost of sales and marketing (including salaries) during a particular time period (perhaps a quarter or the duration of a sales campaign) and divide that by the number of new customers you acquired during that time. Once you have that number it’s easy to work out how long it will take to pay back the cost of acquiring each new customer. Also, by capturing data on the average length of time that you keep a customer, you’ll get a good idea of how profitable your business model is likely to be. If you can attract new clients cheaply and you keep them for a long time then your business is likely to be a winner. However, if it costs a lot to acquire each new customers and they desert you quickly you might want to alter your business plan accordingly.