Why Small Business Metrics and KPIs Important for Driving Success
To succeed in today’s fast-paced data-driven business environment, business owners rely on performance metrics (measures) and KPIs (key performance indicators) to provide the intelligence they need to make decisions correctly and sustain their growth. Being able to quantify and track performance benchmarks is a powerful way for small business owners to refine operations and realize a culture of continuous improvement.
Small businesses can gain a lot of value by harnessing the full potential of the data their company is generating daily. Small business metrics can be both qualitative, meaning they are described using words, or quantitative, meaning they are framed as numbers. In some cases, the most specific KPIs and metrics for your business might be a combination of both types of data points.
In this article, learn how to develop small business metrics and KPIs to drive better performance across your company’s operations.
Business Metrics and KPIs
Business metrics and key performance indicators (KPIs) allow you to measure how well your company is meeting and working to exceed expectations in different areas of your operations. There are metrics available for measuring customer satisfaction, employee retainment rates, and understanding where your products are selling the fastest.
There are also many different ways to develop very situational KPIs to track cash flow, quality, gross profit, the long-term value of specific customer demographic groups, and many other things. Every area of your business from people, to products, and processes can be measured, tracked, and optimized through the use of data analysis.
Digital transformation in the modern business environment is shifting away from manual processes towards more automated ones grounded in the ability to interpret and generate intelligence from data collected in real-time. As small businesses mature, many managers realize that technological innovation is the key to developing more successful and efficient operations.
Small Business Metrics and KPIs that Your Small Business Should Be Measuring to Optimize Performance
To start building a more data-centered organizational culture, you need to start measuring success and qualifying shortcomings. For many small business leadership teams, sales performance metrics are the most logical place to start when looking to build on current success and sustain growth into the future.
Sales Performance KPIs
Your small business should be working to understand the following small business metrics and KPIs:
- Gross Profit = Revenue – Cost of Goods Sold
- Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows
- Inventory Turnover = Sales / Inventory
- Gross Profit Margin = (Net Sales – Cost of Goods) / Net Sales) * 100
- Revenue Per Customer In Dollars = Total Sales In Dollars / Number Of
- Customers Revenue Per Customer As A Percentage = (Revenue Per Customer In Dollars / Total Sales In Dollars) * 100
All of these different indicators can provide actionable insights into the choices your management teams should make to optimize successful business outcomes. However, sales performance data is not everything and as your business matures, you will want to consider many other areas as well.
Human Capital Performance Metrics
For many small businesses, one of the single most variable costs is connected to the expense of human capital. Currently, many small business sectors are experiencing a labor shortage at a time when wages are increasing.
To develop a better understanding of the costs associated with human capital expenditure, your business should be tracking the following KPIs:
- Human Capital ROI = (Revenue – Operating Expenses – Employee Compensation) / Employee Compensation
- Training Investment Value = Total Training Investment /Total Staff Number
- Turnover Rate = (# of Departures / Average # of Employees) X 100
Key Logistics KPIs
Small businesses that are involved with eCommerce and are consistently working with shipping partners can benefit from using key performance indicators to evaluate success. Areas such as supply chain management, production, fulfillment, and customer service all have metrics associated with them that your business should be tracking.
Consider working evaluate the following metrics:
- Average Transport Cost = Average transport cost / (monthly gross income) × 100
- Freight Cost per Unit Shipped = (Cost of freight) / (# units)
- Transit Time to Distance = (time to go from pickup to destination) / (# miles)
- On-Time Shipping = (# orders shipped on-time) / (Total # orders shipped) × 100
- Space Used in Warehouse = (warehouse space with product) / (total warehouse space) × 100
Tracking Performance is Essential to Driving Successful Business Outcomes
Measuring success is one of the most important ways for your business to optimize performance and consistently deliver better and more cost-effective operations. In today’s challenging business environment the key to developing the agility needed to sustain success is found in harnessing the full power and potential of data-driven decision making.
Business metrics and KPIs empower your management teams to make decisions based on observable and verifiable data. Develop KPIs and metrics to provide your teams the insights they need to drive and sustain success long into the future. Your small business digital transformation starts here.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.