3 Essential KPIs to Track
Define what your business goal is and set KPIs to track how you achieve it.
We’ve spoken before about using KPIs (Key Performance Indicators) to increase your cashflow and profit. In this blog, we’ll help you come up with the right KPI structure to track and achieve your goals.
There are two main types of KPI: industry specific and universal. We’ll look at both and how you can apply them to your business as the perfect recipe for success.
If you’d like help with your KPI planning, get in touch.
Here are three KPIs we recommend tracking, plus some advice on how to do it and how it will help your business.
1. Profit Margin
With no profit, there’s no business – so put simply, you need to track your gross profit margin closely. We advise you calculate it quarterly using the following equation:
This gives you a percentage which you can track.
If your gross profit is going up quarter on quarter, then great! You’re heading in the right direction and making money. If, however, it’s going down, then you need to do some reassessment and make any changes necessary.
There are two ways to increase your profit margin using different methods:
With this, you can either (1) decrease the COGS or (2) become more efficient in the usage of the COGS (i.e. less wastage).
- To decrease the COGS you need to cut costs and save money. Start by approaching your suppliers to get better terms or source new ones.
- To become more efficient, you need to look at your systems and processes. What materials are you using? Can you speed up production? Are there any other ways to save money?
2. Revenue Ratio
A simple one to compare year on year results. Again, we recommend you run through this KPI quarterly, to keep comparisons seasonally. This is the calculation:
Your answer will usually be a decimal. If it’s higher than 1.0 then your revenue is growing, excellent! The higher it is, the faster it’s growing.
If you’re not past the 1.0 marker then it’s time to put the pedal to the metal and start to grow your sales. Consider investing in some marketing campaigns to boost revenue and widen your audience.
3. Conversion Rate
The answer to this calculation gives you a percentage of your target customers doing something you want them to do. You can literally measure anything, for example the number of visitors to your website that convert to a sale, or the amount of people on your email newsletter list that click through to a landing page you’ve created. The possibilities are endless, and you can apply it to anything you want to track and measure.
This is the calculation:
This is especially useful for tracking the effectiveness of your marketing campaigns and ensuring you are investing in the right areas to get the results you need.
We suggest you do some groundwork to understand what the typical conversion rates are for your industry, so you have something to benchmark your business against. This way you can avoid setting unrealistic targets that you may fail to achieve.
Tracking these three KPIs will give you a good overall health-check on your business and how it’s performing. There’ll also be more specific ones that you’ll need to track and monitor depending on your type and size of business, giving you a greater understanding of what makes your business profitable and what you need to do to help it grow.
Sound daunting? It doesn’t need to be. Get in touch and we can help.