What are key performance indicators?

To gauge the success of your small business, you need to dive deeper than your end-of-month business account balance. Successful entrepreneurs track a range of key performance indicators for three main reasons: to see how they’re doing, to work out what they need to change, and to plan future business strategy. But what are key performance indicators?

We’ll begin this Countingup guide with an introduction to key performance indicators, and then we’ll reveal seven of the best key performance indicators for small businesses.

• What are key performance indicators?
• Seven great KPIs for small businesses

In a nutshell, key performance indicators, or KPIs, are windows into your business performance. They’re metrics you can use to figure out if your strategies are working or not. Tracking the right KPIs can tell you if your marketing tactics need adjustment, for instance, or if your sales funnel needs attention.

It’s important to set goals before you begin tracking KPIs. In simple terms, KPIs are navigational tools: they can tell you where you are on a journey, but only if you define that journey first. The business goals you set have to be measurable and actionable, rather than ambiguous or too broad. 

Need a few examples? Here are three vague goals, and three measurable, actionable alternatives:

• ‘Be the best company in the UK’ might become ‘increase profits 50 percent by this time next year’.
• ‘Get loads of new customers’ could translate into ‘attract 30 more clients within the next three months’.
• ‘Reduce expenses’ might become ‘reduce electricity costs by 12 percent this year’.

You can create a concrete plan to increase profits, pull in clients or reduce electricity costs by a set amount. That’s where KPIs come into play.

There are an infinite number of KPIs you could track; the ones you do track will depend on your business goals, and about the data you can gather. Here are seven great KPIs to get you started. 

Net profit is one of the most useful KPIs to monitor. Tracking net profit will help you understand if your company is making more or less profit over time. Calculating net profit is relatively simple: you take your gross profit and subtract expenses — materials costs, rent, raw materials and so forth — and the remainder is your net profit.

Occasionally, your net profit might dip — but that isn’t necessarily cause for concern. Investing in new machinery or tech can cause your profit to dip temporarily, for instance.

Tracking cash flow can help you figure out whether your profit margins are high enough, and whether you have enough money on hand to buy supplies. Including a cash flow forecast in your KPI stack can also help you identify and fix small financial issues before they become bigger and harder to handle.

To forecast cash flow, take the current cash and cash-equivalent assets you have, and then add the cash and cash-equivalent assets you expect to bring in over the next four weeks. Then, subtract the cash and cash-equivalent assets you expect to pay out over the next four weeks.

Your net profit margin can tell you how well you’re using your revenue. You can compare your net profit margin from year to year to see if you’re investing in raw materials, wholesale products and other assets wisely. 

To calculate your net profit margin, take your revenue and subtract your cost of goods sold (COGS), your expenses, any debt-related interest on loans, and the taxes you pay. Then, divide that figure by your revenue total and multiply the result by 100 to get a percentage.

The conversion rate KPI isn’t just for ecommerce stores — it’s for any business with a client or customer base. The simplest way to think about conversion rate is to consider the number of potential customers or clients you encounter on a daily, weekly or monthly basis, and calculate the number of actual customers or clients you end up with as a percentage of the whole.

Revenue growth rate is an exciting KPI to track, because it puts a number on your company’s year-over-year success. To determine your growth rate, start with your revenue for the current year and subtract the previous year’s revenue from it. Then, take the number you get and divide it by the previous year’s revenue to determine your revenue growth rate as a percentage.

If you want to find out how well you move goods, monitor your inventory turnover over a set period of time. To come up with a number, calculate the cost of all the inventory you sold in any given month, quarter or year, and divide that figure by the total value of all your remaining inventory at the end of the same time period. 

The relative market share KPI can help you find out how much of the market your company controls. To determine your current slice of the pie, look at the value of the marketplace you’re in and then calculate your sales as a percentage of total marketplace sales.

Business objectives are just as important for small businesses as they are for large businesses. If you intend to grow your company, you can use KPIs to see where you’re at, where you’re going and what you need to do to succeed.

Countingup can help you track financial key performance indicators quickly and easily. When you subscribe to Countingup, you get a business current account and free accounting software in one app. You can use the app to track profit and loss, invoice clients, get real-time tax estimates, share data with your accountant, and much more. Find out more here.