Performance Tracking in Small Business – How should it be done?

October 17, 2022January 20, 2023 Admin Business

Every business owner needs to track the appropriate metrics to have reliable information for making decisions to advance their firm.

Business metrics to track, often known as business performance indicators, are measurable assessments of particular business constituents.

These can be used to keep tabs on, track, and assess whether or not the various company components are succeeding or failing.

Because of the advantages that business intelligence tracking measures offer, having a thorough grasp of business performance measurement is advantageous.

What Are Key Performance Indicators?

Key performance indicators are quantifiable metrics that demonstrate the health of your company. It also calculates the progress of the business toward objectives.

Monitoring KPIs can help you keep business performance tracking and determine whether your efforts are yielding results.

To course-correct and maybe prevent a problem from arising, KPIs can also assist you to identify the areas of your business where things aren’t going as planned.

How to Choose the Right KPI for Your Small Business

There isn’t a set of KPIs that every company should observe. Depending on your mission, business stage, and industry, one should decide which to use.

Nevertheless, there are a few KPIs that every company should use. Additionally, there is a lengthy list of others that, depending on the type of business you can run.

Basically, one can not use all the KPIs. That would not only be challenging, but you would also lose focus on what was most crucial.

When selecting your KPIs, you should take three factors into account:

1) Think About Your Business Goals

While it’s crucial to understand whether a company is becoming more or less lucrative each year, a wise business leader also needs to keep an eye on other metrics.

You can measure what’s crucial to your business with the help of good KPIs. Consider the various business goal you have for your company.

You might have objectives for your clients, customers, staff, business operations, and marketing. What are the measurements most crucial to achieving those objectives?

For some firms, factors like customer satisfaction and client lifetime value may be crucial.

The profitability of other businesses can depend on how productive their employees are or how rapidly their goods are consumed. KPIs will be more useful if you choose them based on your business goal.

2) Consider Your Business Stage

At different business phases, several KPIs will become increasingly significant.

Days sales outstanding (DSO) may receive more attention from a young company striving to normalize business cash flow because it reveals to them how quickly they can convert an account receivable into cash.

DSO may not be as important to an older business. To assist them to expand the firm, they might wish to put more emphasis on staff retention.

Consider concentrating on KPIs that are most pertinent to the stage of your organization.

3) Lagging And Leading Indicators

The ideal KPI combination includes both lagging and leading indicators.

A leading indicator looks forward and has the power to affect outcomes. A lagging indicator, on the other hand, is retroactive and will inform you of the organizational problem.

Customer happiness is one such leading indication. Customers are more inclined to return if they are satisfied with your good or service. That is a sign that the sales of your company will remain strong.

Profit is an illustration of a lagging indicator. You may determine just how well your company fared using that metric. It does not, however, provide you with a forecast of how your company will perform going forward.

KPI You Should Track

There are a few KPIs that practically every organization should be tracking.

These fundamental KPIs can be used to track business performance measurement.

They are the right place to start even though they are probably not the only KPIs you’ll want to monitor (more on additional KPIs you’ll want to consider below).

1) Net Profit

Keeping track of your net profit over time is a straightforward KPI for small businesses to implement. Is the profitability of your business increasing or decreasing over time?

Revenue – Expenses = Net Profit

You won’t constantly anticipate an increase in net profit. Profits can occasionally fall off when you make investments in the company or when the economy is struggling.

However, monitoring your earnings will allow you to determine whether your company makes more money than it spends. Undoubtedly, that is a crucial measure to understand.

2) Net Profit Margin

Your business’s profitability is determined by your profit margin, often known as your net profit margin.

It will display how effectively your revenue is being utilized, much like the net profit metric does. Hence, it serves as a gauge of the profit your company generates from sales.

Net Profit ÷ Revenue = Net Profit Margin

3) Quick Ratio

Monitoring cash flow is crucial for organizations. It’s one of the primary causes of small enterprises failing.

A KPI called the quick ratio makes it simple to determine whether you have enough cash, securities, and money not coming in soon (your accounts receivable) to pay your liabilities. The math is as follows:

(Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities = Quick Ratio

Your quick ratio should be 1 or greater to indicate that you have adequate cash and liquid assets (assets that can be quickly sold for cash) to pay all of your current obligations.

A quick ratio of less than 1 indicates that it might be harder to pay your existing obligations.

4) Monthly Burn Rate

The best company plans require funding to survive. Measuring the company’s monthly burn rate is a great approach.

It determines how quickly one is using cash and how long the organization will survive or when it is time to raise capital again.

It is true whether they are raising funding from investors or living on the funds initially put in.

5) Customer Acquisition Cost

Do you know how much it costs to bring in a new client or customer for your company?

It’s possible that you won’t be concerned with the expense of acquiring a sale in the early phases of your company. But when your company expands, it’s crucial to monitor this measure.

By calculating your customer acquisition cost (CAC) you can know the cost required to acquire a single customer. You would use the following equation:

Customer Acquisition Costs = (Sales expenses + Marketing expenses) ÷ (New Customers)

6) Lifetime Value Of A Customer

What is the value of a customer? Knowing this statistic is crucial since it can influence how much you can spend on sales and marketing expenses.

If you are aware that your typical customer spends $100 with you, you should make sure that your acquisition expenses are significantly lower.

It is more difficult to quantify than some other business performance indicators. Because of this, some businesses will find it simpler to measure it than others.

If your company uses a retainer arrangement with clients that is quite simple to measure:

The average retainer fee times the typical number of months a client works with you equals the lifetime worth of a client.

You may need to conduct a little more research if you work with clients on a project-by-project basis.

You can get the typical lifetime value of a customer by calculating the typical number of projects you complete with a client and the typical cost of each project:

Lifetime Value Of Client = Average Retainer Price x Average Number Of Months A Client Works With You

Other KPIs to Consider Tracking

Not just the KPIs listed above one should calculate various other business performance tracking that can provide you with an accurate assessment of how your business is operating, depending on the type and stage of your organization.

1) Conversion Rate

This fundamental indicator counts the number of prospects who convert into paying clients. Depending on the type of business you run, there are many different techniques to monitor conversion rates.

If you run an online store, you may gauge this by comparing the number of visitors to your site last month to the number of individuals who made purchases there.

Say you receive 10,000 unique visitors each month and 400 purchases. 4% would be your conversion rate.

A company’s conversion rate is 20% if they pitch ten potential clients in a month and secure two of the projects.

You can determine whether adjustments you make to your sales and marketing are improving or not your conversion by monitoring your conversion rate over time.

2) Gross Profit Margin

Your gross profit margin is one KPI you should track if your company sells things.

You may determine how much money is left over after paying for the product you sold by looking at your gross margin ratio.

You can figure out your company’s gross margin ratio on a product-by-product basis or overall.

Let’s imagine your cost of goods sold (COGS) was $4,000 and you sold $10,000 worth of items in a month.

60% represents the gross profit margin as a percentage. You can figure it out by dividing your gross margin = $10,000 in sales – $4,000 in COGS ÷ total amount of sales.

You would perform the same calculation for each item if you wanted to determine which things would be the most profitable for you to sell.

You’ll have more money left over to cover other business costs like employees, rent, and marketing if your gross profit margin is higher in your financial statements.

3) Monthly Recurring Revenue

Some service-based companies could have clients on retainer, which provides them with recurring monthly income.

Your monthly recurring revenue is $2,000 if you have two $1,000 per month recurrent customer contracts.

Planning can benefit from this. As a result, you will roughly know what your minimum monthly income for the month is going to be.

4) Days Sales Outstanding

How effective is your company at receiving payments? It is crucial for any kind of business, but especially for startups or companies trying to balance their cash flow in various market conditions.

DSO calculates how long a receivable has been unpaid. For instance, how long does it typically take for your business to receive payment after a sale?

Days Sales Outstanding = (Accounts Receivable/Net Credit Sales)x Number of days

When your DSO rises or becomes excessive, as a result, it is time to concentrate on streamlining your receivables process.

5) Website Traffic

Knowing how much traffic your website receives is one of your essential metrics if you run an online business.

There is no math involved with this. Instead, you’ll make use of a tool like Google Analytics to assist you in monitoring long-term traffic trends.

You may better understand your visitors by keeping track of your traffic and learning the causes of spikes and dips in it.

Does running an advertising campaign in competitive market increase traffic? Does having a sale cause more of a traffic increase? Is your traffic steadily increasing (a positive sign) or gradually declining? Make a business plan according to your goals then.

Social media engagement is a useful KPI to monitor if your business depends on social media to bring in customers.

You can determine what kinds of posts assist your business to grow by tracking likes, comments, and shares.

There is no need for intricate computations here, similar to website traffic.

You can concentrate your efforts by keeping an eye on and tracking patterns over time. As a result, you’ll have more time to focus on writing the posts and content that will help your company develop.

7) Customer Satisfaction

Your customers hold the secret to your company’s success.

Clients and consumers who appreciate your services and like doing business with you are more likely to use your services again or refer you to others.

How can you tell if you’re fulfilling the needs of your customers and clients? Measuring client happiness can be a fantastic way to see how your business is performing and what your growth trend will look like.

Conducting a survey is one technique to measure client happiness. Ask clients to rank their level of satisfaction on a scale of great to bad.

You can determine whether your consumers are satisfied with your product or service by monitoring scores over time (and getting happier). Or whether you need to address a problem.

8) Net Promoter Score

The net promoter score is another customer-focused indicator. This rating reflects how devoted your clients and customers are.

One question, and you can calculate the score. Ask your respondents how likely are they to recommend your company to their friends or colleagues.

They then provide a score for their response ranging from zero to ten. Zero indicates they are highly unlikely to, while ten indicates they are most likely to.

Despite how easy it looks, there’s a good reason why this works so well. The cheapest and most effective way to acquire new clients and consumers is through your current clientele.

Knowing whether your company is ready to grow organically or not is a useful signal. Or if there are any service problems that you need to fix.

9) Employment Retention Rate

The cost of hiring and training new personnel is substantial. The more time and money you invest in acquiring and training new employees, the longer a good employee remains with your business.

Because of this, when your business expands, one of your KPIs should concentrate on keeping the best staff.

Employee retention rate is one KPI you may use to gauge this.

Let’s assume you had 20 employees when the year began to compute this. 16 of those workers are still employed by your company at the end of the year. You have an 80% retention rate.

The proportion is calculated by multiplying the number of employees who were kept on (16) ÷ the total number of employees at the start of the year (20) * 100.

A declining employee retention rate is a sign that there is room for improvement, such as in employee satisfaction.

Bottom Line

For your company to be healthy, tracking KPIs is essential.

Making educated decisions even during financial problems to expand your business can be facilitated by selecting the appropriate KPIs and applying technologies to monitor them.

Before starting any of these calculations, if you don’t have a business plan, then make it first with the help of Upmetrics.