Finding a Key Performance Indicator (KPI) to Measure Your Business
Every business owner has some way to measure the growth and success of their business. My father-in-law was a commercial and industrial movie producer. I asked him what he considered a key performance indicator (KPI) that measured the health of his business. He explained that, if he had a large telephone bill, he knew the next few months’ revenue would be good. The large telephone bill meant that his staff was making calls to line up actors, cameramen, lighting and sound engineers, props, air travel and hotel rooms. He therefore knew a large production would be starting, and good revenue would follow. Dad’s indicator came from many years of experience with his business. This was not exactly logical or professional, but it worked for him.
How do businesses today gauge their performance? They use KPIs. KPI stands for Key Performance Indicator. KPIs are a set of quantifiable measures that a company uses to gauge its performance over time.
I have summarized five basic KPIs every business owner can use. The data for these KPIs can all be generated from professional accounting software, such as Sage 50.
1. Sales Revenue
This is the obvious first KPI most businesses use, the money coming through the door. Within this KPI there can be additional measurements such as: revenue per location, as used by fast food businesses; revenue per employee, as used in sales organizations; revenue by product or product line, as used in the distribution business. I am sure you can determine other sales revenue metrics which are proper for monitoring revenue for your type of business.
2. Gross Profit and Gross Margin
Gross profit, which is related to net profit (see below) is revenue less cost of goods sold. This metric only considers the variable expense needed to generate revenue. Gross margin is gross profit divided by revenues and is also expressed as a percentage. Gross margin is also commonly referred to as gross profit percentage. This term is often discussed when owners or management, in the same business, meet to discuss their companies. Sage 50 offers an easy way to calculate and manage this KPI and assess its changes over time.
3. Net Profit and Net Profit Margin
Net profit is revenue less cost of goods sold, operating and other expenses, interest and taxes. This is usually referred to as the “bottom line”, or net income. Net profit margin is a stronger indicator of business’s financial health. Net profit margin is calculated by dividing the net profit by revenue and is usually expressed as a percentage. If your net profit margin does not increase over time, it may mean you need to increase prices or better control your expenses. As with gross profit, Sage 50 offers an easy way to calculate and manage this KPI and assess its changes over time.
4. Monthly Recurring Revenue
In a subscription-based business monthly recurring revenue (MRR) is one of the most critical business metrics. There are additional aspects of MRR to analyze, such as:
- new MRR, for new customers,
- expansion MRR, for customers who upgraded their buying,
- churn MRR, revenue lost from customers cancelling their purchases before their expected average customer lifespan.
MRR can also be used as a key planning metric for.forecasting.
5.Customer Acquisition Cost
Your business cannot succeed without customers. What is your cost to acquire a new customer? Do you do research about a potential customer via email, cold calling, social media outreach or other methods? Did you entertain the potential customer? All of these have associated costs. Customer acquisition cost (CAC) is calculated by the total customer acquisition costs divided by the number of new customers acquired. Sometimes you are so focused on acquiring a new customer or closing a deal that you forget how much was spent to acquire that customer. Monitoring CAC over time will greatly aid you in determining the success of your company in acquiring new clients.
Using various KPIs will determine if you are meeting the growth goals for your company. Monitoring KPIs regularly can help you find issues and correct them before there is a negative impact on your business. Let your imagination guide you in determining other KPI’s which are appropriate for your specific business.
A search of the Internet will uncover many reference articles on KPI’s, metrics, and lists of other business measurements.
Need help figuring out how to configure your Sage 50 software for your own KPI’s? Give us a call at 610-941-2116 or email us at email@example.com to discuss what you want to measure and see what we can offer by way of reporting on and managing you key performance indicators.