Want to know if your small business is thriving or just surviving? These 8 key performance indicators (KPIs) will tell you:
- Growth Rate – How fast you’re expanding
- Gross Profit Margin – Money left after costs
- Cash Flow – Money coming in and going out
- Customer Acquisition Cost – Price of getting new customers
- Customer Lifetime Value – Total worth of a customer
- Inventory Turnover – How quick products sell
- Employee Performance – What each team member achieves
- Free Cash Flow – Money left after running costs
Why track these? They show where you’re winning and where you need work. But knowing isn’t enough – you’ve got to use these insights to make smart moves.
Let’s break down each KPI and see how real businesses use them to level up.
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1. How Fast Your Business is Growing
Think of your business growth rate as your company’s speedometer. It shows how fast you’re moving forward and helps you navigate your next moves.
Why It Matters
Your growth rate is a snapshot of your sales increase over time. It’s a key health indicator for your business. An upward trend? That means more customers and possibly a bigger slice of the market pie. Investors love to see that!
Crunching the Numbers
Here’s how to calculate your revenue growth rate:
(Current Period Revenue – Prior Period Revenue) / Prior Period Revenue
Let’s say Serial Juice Co. made $750,000 last year and $1,000,000 this year. The math looks like this:
($1,000,000 – $750,000) / $750,000 = 0.33 or 33%
That’s a solid 33% growth! But what’s "good" depends on your industry and company size.
How Do You Stack Up?
To put your growth in context, look at industry averages. In the SaaS world, OpenView‘s 2022 benchmarks show median growth rates from 30% to 100%, varying by company size:
| Revenue Range | Median Growth Rate |
|---|---|
| <$1M | 100% |
| $1-2.5M | 79% |
| $2.5-10M | 50% |
| $10-20M | 72% |
| $20-50M | 40% |
| >$50M | 30% |
Don’t sweat it if your numbers are different. The key is understanding why and what you can do about it.
Keep an Eye on the Trends
Don’t just look at yearly numbers. Track month-to-month to spot trends and seasonality. This can help you:
- Plan for slow periods
- Catch sudden changes
- Make smart hiring and inventory decisions
If you notice summer slumps, you might plan marketing pushes or product launches to boost those slower months.
Real-World Growth
Take Amazon, for example. They’ve kept growing by constantly innovating. They poured money into robotics and AI, cutting labor-intensive operations by over 70%. This efficiency boost fueled their ongoing expansion.
"Understanding your company’s growth rate may be more difficult for you as you can’t compare one month to the other." – Chad Hooker, VP, Fulcrum Equity Partners
This quote highlights why context matters. If you run a seasonal business, yearly comparisons might make more sense than monthly ones.
Putting Growth to Work
Remember, growth isn’t just about bigger numbers. It’s about building a business that lasts. Use your growth rate insights to:
- Spend resources wisely
- Spot areas for improvement
- Set realistic goals
- Attract investors or secure loans
2. Your Profit After Costs
Ever wonder how much cash you’re actually pocketing after paying for your products or services? Enter the gross profit margin – your small business’s financial health meter.
What’s Gross Profit Margin?
It’s the percentage of revenue you keep after subtracting the direct costs of making your goods or services. Here’s the formula:
Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue x 100
Let’s break it down with a real example:
You run "Bean There, Done That", a cozy coffee shop. In a month, you sell $50,000 worth of coffee and pastries. Your ingredients, packaging, and direct labor cost $30,000.
Your gross profit margin?
($50,000 – $30,000) / $50,000 x 100 = 40%
Translation: You keep 40 cents of every dollar you make.
Why Should You Care?
Knowing your gross profit margin helps you:
- Price your stuff right
- Spot where you’re wasting money
- See how you stack up against other businesses
What’s a Good Margin?
There’s no one-size-fits-all answer, but here’s a quick guide:
| Margin | What it Means |
|---|---|
| 0-10% | Needs work |
| 10-20% | Low, but might be normal for some businesses |
| 20-40% | Average |
| 40-60% | Good |
| 60%+ | Awesome |
But remember, it varies by industry. Restaurants? They’re usually at 3-9%. Professional services like coaching? They can hit 20% or higher.
Real-World Example
Take Apple. In 2022, their product gross margin was 43.3%. That’s why they can pour money into creating new stuff and still make their shareholders happy.
As CPA Kristen Slavin puts it:
"Gross profit margin is an important metric for measuring the overall financial health of your business."
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How to Boost Your Margin
- Push your high-profit items
- Haggle with your suppliers
- Cut the waste in your operations
- Play with your pricing based on demand
- Keep an eye on your margin every month
3. Money Coming In and Going Out
Cash flow is your small business’s lifeblood. It’s about tracking money flowing in and out of your company. Without a clear cash flow picture, you might struggle to pay bills or invest in growth.
Why Cash Flow Matters
Picture this: You run "Bean There, Done That", a bustling coffee shop. You’re selling lattes left and right, but if suppliers need payment before customers settle up, you’re in hot water. No wonder 69% of business owners lose sleep over cash flow.
Here’s how to stay on top of your cash:
- Check your bank balance daily. Spot any unexpected changes.
- Review your cash position weekly. Look at upcoming bills and expected payments.
- Analyze monthly. Compare actual cash flow to projections. Refine forecasts and spot trends.
Tools of the Trade
Ditch the spreadsheet and willpower combo. Modern tools do the heavy lifting. Take Peakflo, for example. It tracks budget and cash flow in real-time and sends automated reminders for overdue payments. Result? You get paid on time, keeping your cash flowing smoothly.
Cash Flow Forecasting
Looking ahead is key. A cash flow forecast helps predict future cash needs based on past patterns and current trends. This foresight is a game-changer for planning investments or prepping for slow seasons.
"Healthy businesses must be able to generate enough cash to meet daily operating expenses with enough left over to invest in growth." – Megan Doyle, freelance contributor at American Express
Building a Cash Reserve
Aim for a cash reserve covering 3-6 months of expenses. This nest egg can save your bacon during tough times or when unexpected opportunities knock.
Real-World Impact
Take this small manufacturing company that nearly went under due to poor cash flow management. Full order book? Check. Ability to pay suppliers? Nope. Customers were dragging their feet on invoices.
The turnaround? They implemented strict cash flow monitoring and used software to automate invoice reminders. Within six months, they slashed late payments by 60% and built up a two-month cash reserve. Now that’s a comeback story.
4. Cost to Get New Customers
How much does it cost to bring a new customer on board? That’s what Customer Acquisition Cost (CAC) tells you. It’s a crucial metric that shows how well your marketing and sales efforts are working.
CAC Explained
CAC is the money you spend to get one new customer. Here’s the simple formula:
CAC = Total Sales and Marketing Expenses ÷ Number of New Customers
Let’s look at a real example:
You run "Suds & Bubbles", a local car wash. Last month, you spent $5,000 on marketing and got 100 new customers.
Your CAC? $5,000 ÷ 100 = $50 per customer.
Why CAC Is Important
Knowing your CAC helps you:
- Evaluate your marketing effectiveness
- Plan your customer acquisition budget
- Determine profitability per new customer
Industry CAC Benchmarks
CAC varies a lot across industries:
| Industry | Average CAC |
|---|---|
| B2B SaaS | $239 |
| eCommerce | $70 |
| Financial Services | $784 |
| Higher Education | $1,143 |
Don’t worry if your numbers are different. What matters is understanding why and how to improve.
CAC Success Story
Thomas International, a talent assessment tech company, started focusing on CAC and customer lifetime value (LTV). The result? Better forecasting, budgeting, and data-driven decision-making. They said:
"When the Thomas team began focusing on incorporating new KPIs like CAC and LTV into their financial planning, they became a stronger strategic partner within the rest of their organization by providing reliable quarterly forecasting, on-demand reporting into team budgets and targets, and more reliable data."
How to Lower Your CAC
Try these practical tips:
- Streamline your conversion funnel
- Use retargeting to bring back interested visitors
- Improve ad targeting with themed ad groups and negative keywords
- Encourage customer referrals
Aim for a customer lifetime value (LTV) to CAC ratio of 3:1 or higher. This means each customer should bring in at least three times what it cost to acquire them.
5. How Much Customers Spend Over Time
Want to know how valuable your customers really are? Enter Customer Lifetime Value (CLV). It’s not just about single purchases – it’s about the total worth of a customer over their entire relationship with your business.
Why should you care about CLV? Simple:
- It helps you decide how much to spend on getting new customers
- It shows you which customers to focus on keeping
- It guides where to put your marketing dollars
Here’s a quick way to figure out your CLV:
CLV = (Average Purchase Value x Purchase Frequency) x Average Customer Lifespan
Let’s look at a real example:
Regina’s Roof Repair has these numbers:
- Average Purchase Value: $2,500
- Purchase Frequency: 1 purchase per year
- Average Customer Lifespan: 2 years
So, their CLV = ($2,500 x 1) x 2 = $5,000
This means each customer is worth $5,000 to Regina’s business over time.
Now, CLV isn’t the same for every business. Check out these industry examples:
| Industry | Average CLV |
|---|---|
| HVAC | $15,340 |
| Commercial Insurance | $125,190 |
| Netflix (Subscription) | $291.25 |
Don’t sweat it if your numbers are different. What matters is knowing YOUR CLV and working to make it better.
Want to boost your CLV? Try these:
- Make your customer experience awesome. The Zendesk Customer Experience Trends Report 2022 says over 90% of customers will spend more with businesses that offer smooth, personalized experiences.
- Keep the customers you have. It’s 5 times cheaper to keep a customer than to get a new one. But get this – only 18% of companies focus on keeping customers over getting new ones.
- Check in regularly. Do Strategic Business Reviews at least twice a year. They’ll help you spot ways to improve and add more value for your customers.
- Use your data. CRM software can help you analyze sales and customer behavior. Use this info to tailor what you offer and how you market it.
As Gaetano DiNardi from Nextiva puts it:
"Customer lifetime value is a measurement of the sustainability of your business model."
So, start measuring your CLV. It might just be the key to your business’s long-term success.
6. How Quick Products Sell
Keeping an eye on how fast your products sell is key for small business owners. This metric, inventory turnover, shows how well you’re managing your stock and can make or break your profits.
Why It’s a Big Deal
Think of inventory turnover as your business’s heartbeat. A good rate means you’re selling stuff quickly and not wasting money on unsold goods. But if it’s slow? That could mean weak sales or too much stock – both bad news for your wallet.
Let’s look at a real-world example:
You run "Suds & Bubbles", that car wash we talked about. Last year, your cost of goods sold was $100,000, and your average inventory value was $20,000.
Your inventory turnover ratio would be:
$100,000 / $20,000 = 5
This means you’re flipping your inventory 5 times a year, or about every 73 days (365 / 5).
How You Compare
Inventory turnover isn’t one-size-fits-all. Here’s a quick look at different industries:
| Industry | Average Inventory Turnover |
|---|---|
| Auto Dealers | 5.8 (63 days) |
| Food Stores | 11.4 (32 days) |
| Fashion Retailers | 4 to 6 |
Don’t sweat it if your numbers are different. What matters is knowing your industry and getting better over time.
Real-Life Example
Take Limbo Jewelry. They use Lightspeed‘s reports to track their inventory like hawks. Anne Rutt-Enriquez from Limbo says:
"They say we’re the most organized store they work with because we’re able to pinpoint exactly what’s selling, exactly what’s not selling."
This sharp insight helps Limbo talk to vendors and order smarter.
Speeding Up Your Turnover
Want to move your inventory faster? Try these:
- Cut the dead weight: Regularly check your stock and get rid of slow movers.
- Get better at forecasting: Use past sales to guess future demand more accurately.
- Price smart: Tweak prices to move inventory when needed.
- Promote wisely: Run targeted sales to boost specific items.
But remember, faster isn’t always better. As Jul Domingo, an industry pro, notes:
"A fast inventory turnover can mean two things: fantastic sales or inadequate stock."
The trick is finding the sweet spot for your business.
7. What Each Employee Achieves
As a small business owner, you need to know what your team members are bringing to the table. Employee performance metrics help you see who’s productive, efficient, and contributing to your company’s goals. Let’s look at how you can measure and boost your team’s output.
Why It Matters
Tracking employee performance isn’t just about keeping score. It’s about making sure everyone’s efforts line up with your business goals. When done right, it can:
- Show you who your top performers are
- Highlight areas where team members might need help
- Make sure everyone’s doing their part
Metrics That Matter
There’s no one-size-fits-all approach, but here are some key areas to focus on:
- Work Quality: This could be manager reviews or structured methods like management by objectives (MBO).
- Work Quantity: Think sales numbers, units produced, or other measurable outputs.
- Work Efficiency: How fast and well are tasks getting done?
- Organizational Performance: How does each person’s work help the business overall?
Real-World Impact
Here’s something to think about: Gallup found that highly motivated employees take up to 37% fewer sick days. That’s money in your pocket.
Putting It Into Practice
Here’s how to start measuring what each employee achieves:
- Set Clear Goals: Use the MBO approach. Work with each employee to set specific, measurable goals that fit your business objectives.
- Use Different Metrics: Don’t just rely on one number. Erik van Vulpen, Founder and Dean of AIHR, says:
"The best metric is a combination of different qualitative and quantitative employee performance metrics, done by multiple people."
- Try 360-Degree Feedback: Get input from managers, peers, and even clients for a full picture.
- Ask for Self-Assessments: Regular self-evaluations can boost engagement and give you valuable insights.
- Use Technology: HR software can help you track and analyze performance data easily.
Overcoming Challenges
Measuring employee performance isn’t always easy. A Forbes study found that 82% of managers have trouble holding others accountable. To fix this:
- Give clear, ongoing feedback
- Have regular check-ins to discuss progress and challenges
- Train managers on effective performance management
The goal isn’t to micromanage. It’s to create a culture where everyone’s always improving and working towards the company’s goals.
8. Money Left After Running Costs
As a small business owner, you need to know how much cash you have left after paying all your bills. This is called Free Cash Flow (FCF), and it’s a key indicator of your business’s financial health.
Why FCF Matters
FCF shows you the money your business generates after covering operating expenses and capital expenditures. It’s the cash you can use to:
- Grow your business
- Pay off debts
- Give yourself a bonus
- Build up savings
How to Calculate FCF
Here’s the simple formula:
FCF = Operating Cash Flow – Capital Expenditures
Let’s look at an example:
You run "Suds & Bubbles", a local car wash. Last year, your operating cash flow was $60,000, and you spent $35,000 on new equipment.
Your FCF would be:
$60,000 – $35,000 = $25,000
So, you have $25,000 to use as you see fit.
What’s a Good FCF?
There’s no magic number, but a positive and growing FCF is usually good. But context matters. A negative FCF isn’t always bad if you’re investing in future growth.
FCF in Action
Take Notion AI, a productivity software company. In 2022, their FCF jumped to $344 million from $162 million the year before. This cash boost let them pour money into product development and marketing, fueling their rapid growth.
How to Boost Your FCF
Want to improve your Free Cash Flow? Try these:
- Tweak your pricing: Even small increases can make a big difference.
- Keep a tight rein on inventory: Don’t tie up cash in excess stock.
- Talk to your suppliers: Better terms can improve your cash flow timing.
- Cut the fat: Regularly review and trim unnecessary expenses.
Erik van Vulpen, Founder of AIHR, puts it well:
"Free Cash Flow is the lifeblood of any business. It’s what allows you to weather storms, seize opportunities, and build for the future."
Using FCF to Make Decisions
Your FCF can guide big business choices. For example:
- Thinking about expanding? A strong FCF might mean it’s time to open a new location or launch a new product.
- Got debt? A healthy FCF could help you pay it off faster.
- Need an upgrade? A robust FCF might let you invest in new tech or equipment to boost efficiency.
Conclusion
Tracking the right KPIs is like having a GPS for your business. It shows you where you’re winning and where you need to improve. Here’s why these 8 KPIs matter:
1. Growth Rate
It’s your business’s speedometer. A healthy growth rate means you’re on the right track.
2. Gross Profit Margin
This tells you how much you’re keeping from each sale. Revenue might look good, but profit pays the bills.
3. Cash Flow
It’s your business’s lifeblood. Even profitable companies can struggle without it.
4. Customer Acquisition Cost
Knowing this helps you spend your marketing budget wisely.
5. Customer Lifetime Value
This shows which customers are your golden geese.
6. Inventory Turnover
It’s about keeping your stock fresh and your cash moving.
7. Employee Performance
Your team’s productivity directly impacts your bottom line.
8. Free Cash Flow
This is the money you have left to grow, pay off debts, or reward yourself.
But here’s the thing: Knowing your numbers is just the beginning. The real power comes from using these insights to make smart moves.
Take Notion AI. In 2022, their Free Cash Flow jumped from $162 million to $344 million. What did they do? They poured it into product development and marketing, fueling their growth.
Or look at Limbo Jewelry. By tracking their inventory turnover closely, they became "the most organized store" their vendors work with. This helps them order smarter and keep customers happy.
Here’s how to put these KPIs to work:
- Start small: Pick 3-4 KPIs that match your current goals.
- Be consistent: Track your chosen KPIs regularly to spot trends.
- Use technology: Even a basic financial system can help you track these numbers.
- Reassess regularly: As your business evolves, so should your KPIs.
- Share with your team: When everyone knows what success looks like, they’re more likely to contribute.
As Erik van Vulpen, Founder of AIHR, puts it:
"Free Cash Flow is the lifeblood of any business. It’s what allows you to weather storms, seize opportunities, and build for the future."
