Your business is rolling along, you seem to be making a profit, and it feels like you’re growing. That’s all great news — but it doesn’t necessarily mean that your business is in good financial health. Certain key performance indicators (KPIs) are quantifiable, and these are the metrics you need to gauge the true success of your business.
Not only do you need these numbers to grow and thrive, but they also need to align with your overall business goals. Because each organization has a unique goal, so too should you take a customized approach to track the KPIs that best support those goals. Ultimately you want to watch the KPIs that are SMARTER than the numbers you’re looking at now:
Once you’ve aligned these KPIs and your business goal, you can start looking at the following areas.
1. Gross Profit Margin: Simply put, this is the revenue you’re bringing in after you factor in the expenses directly associated with the products you’re selling. This KPI doesn’t include costs like taxes or other operating expenses. Here’s the formula:
Gross profit margin = (revenue – costs of goods sold) ÷ revenue
The final number should be enough to cover your fixed costs and leave you with some left over for other non-fixed costs. The number you’re aiming for is about 10%, and while anything lower should be worrisome, it could vary by industry. As long as you’re reaching (or going over) this number, you’re in good shape.
2. Net profit: This KPI is an easy one to track and calculate. It’s the money you can pocket at the end of the day, after you’ve paid all of your bills:
Net profit = total revenue – total expenses
There’s no “magic number” here, although you do want it to be a profit and not a loss.
3. Net profit margin: Calculate how much of your revenue was actually profit with this KPI, which accounts for both fixed and non-fixed expenses as well. This is a great indicator of future profits and will help better assess your profitability goals.
Net profit margin = (total revenue – total expenses) ÷ total revenue
Compare this metric to the gross profit margin to help determine if you need to scale back on non-fixed costs to grow your overall revenue.
4. Current ratio: If you’re looking to keep cash flowing, this is the number to keep an eye on. It’s a metric that speaks directly to your liquidity, and the higher it is the less likely you’ll need to depend on a line of credit if you need to pay off big bills or make a major business purchase.
Current ratio = current assets ÷ current liabilities
Current assets are cash on hand or cash expected within the next year, and liabilities are just that — debt that you’ll have to pay back within the same amount of time. Ideally this number should be between 1.5% and 3%. Anything that falls below 1% should sound warning bells and could indicate a serious cash flow problem.
5. Quick ratio: This is a quick glance at liquidity that determines your ability to pay financial debts ASAP. Although the current ratio KPI is a great metric to help determine long-term financial health, a quick ratio gives a much better picture of cash flow.
Quick ratio = (current assets – inventories) ÷ current liabilities
You may already know of this metric as the acid test that truly speaks to cash on hand and very short-term liquidity.
6. Customer acquisition: Want to know how much money you make by bringing in each new customer? This is the KPI to watch.
Customer acquisition ratio = net expected lifetime profit from customer ÷
cost to acquire customer
While acquisition costs can vary from business to business and throughout industries, you should consider the cost of bringing this customer on board and how often they’ll be buying from you. The goal here is a result of one — that means for every dollar you spend bringing in new customers, you’ll get a dollar in return. Higher than one is great, lower than one means you’re spending too much to get buy-in.
The bottom line is that you need these KPIs to truly understand your bottom line. Without a clear vision of how financially healthy your business is, it’s hard to make important decisions that will help it grow and thrive. Need help creating a personalized set of SMARTER goals and KPIs for your business? Request to qualify for a one-on-one business diagnostic and meet the advisory board.