Are you Using KPIs to Grow your Business?
December 30, 2022
| BankingFocus-Banking Focus
The 2022 year sure went by quickly! Here we are again at the end of the year. You likely continue to navigate uncharted waters in your business having dealt with the pandemic not very long ago, and now a possible recession is looming. In this environment it may be more important than ever to keep tabs on certain metrics in your business. We hope this month’s article gives some good ideas. From all of us at Security Bank, we wish you a joyous Christmas and New Year!
Use These 9 KPIs To Grow Your Business Faster
By: Quickbooks Blog
As a business owner, you need to know how to track your progress toward achieving your business objectives. Looking at things like revenue and profit on a balance sheet can only take you so far.
Key performance indicators (KPIs) are the best performance measurement metrics you can use to track progress towards your business goals. Tracking relevant KPIs can assist in decision-making, help you set strategic objectives, and allow you to evaluate your business progress in real-time.
When crafting your own KPIs, make sure they meet these four criteria:
1. They are actionable.
2. You can measure them accurately.
3. They are timely.
4. They impact the bottom line.
9 Example KPIs
1. Cash flow forecast
Cash flow forecasts help businesses assess whether their sales and profit margins are appropriate—making this KPI one of the most critical metrics to track.
Estimate your sales to predict the amount of cash that may come into your business each month. From there, calculate your days sales outstanding—this tells you the average number of days it takes to receive payment from customers. Next, estimate the fixed and variable expenses your business will pay each month. Finally, bring it all together. Add the current month’s projected receipts to last month’s cash balance, then subtract your projected expenses. The result is the current month’s projected cash flow. Repeat these steps for each month.
2. Gross profit margin as a percentage of sales
This measure demonstrates total profits compared to revenue.
Find gross profit margin by dividing your gross profit amount (revenue minus cost of goods sold) by your total revenue. Divide that value by your sales amount to find out how much of your gross profit margin makes up your overall sales. By tracking this KPI over time, you can easily quantify how much money you’re keeping against the amount paid out to suppliers.
3. Funnel drop-off rate
Your funnel drop-off rate assesses the number of visitors who abandon a conversion process or sales funnel before completion. By identifying when prospective buyers abandon the conversion process, companies can identify problems and make necessary adjustments to boost sales. With so many small businesses relying on the internet as a sales tool and with face-to-face interaction declining, funnel drop-off rate has become one of the most crucial KPIs to track.
4. Revenue growth rate
Revenue growth refers to the rate at which a company’s income or sales growth is increasing. The growth rate indicates how well your company can grow in sales over a specific time period. By calculating the revenue growth rate regularly, you can assess whether growth is increasing, decreasing, or plateauing, and by how much.
5. Inventory turnover
Inventory turnover measures the number of units sold or used in each period. A slow inventory turnover may be a result of slow sales or excess inventory. A faster ratio may indicate strong sales or insufficient inventory. Knowing how fast inventory moves can help you make more informed decisions on pricing, marketing, and purchasing.
6. Accounts payable turnover and accounts receivable turnover
Accounts payable turnover measures how often your business pays for goods and services in each period. Understanding your accounts payable turnover can help you understand how efficiently your company pays off short-terms debts. Once you know how much you spend on suppliers, you can determine if you need to take steps to reduce spending.
On the flip side, accounts receivable turnover measures how efficiently your company collects revenue. A higher ratio indicates that you collect money from customers more often throughout the year. A low ratio may present an opportunity to collect on outstanding receivables more often.
7. Relative market share
One of the most crucial performance indicators, this shows you how much of a given market your company controls. Unlike internal metrics, relative market share reveals how a company is performing relative to its competitors in the same space. Once you calculate your relative market share, you can make strategic adjustments to your product and service offerings to improve long-term profitability for your business.
Finding your relative market share requires a little bit of research into your biggest competitors, but tools are available.
8. Customer retention
It’s more costly to attract new customers than it is to retain existing customers. Plus, understanding your customer retention metrics can help you zero in on your most valuable customers and strongest demographics, to adjust your sales and marketing strategies accordingly. A high churn rate or low repeat purchase ratio is a good indicator that there’s a problem with your customer support system.
9. Quick ratio
The quick ratio measures your company’s ability to pay off debts with the cash or near-cash assets you have right now (converted to cash within 90 days). Knowing how quickly you can pay back your business debts, especially during times of economic uncertainty, is important for every small business owner. Use this ratio to monitor your liquid assets so you’re never caught off guard. A healthy quick ratio should be greater than 1. Anything less indicates more debt than assets. The current ratio, a very similar metric, is a bit less conservative.