We measure things all the time — sometimes without even realising. From the flour in the cake recipe to checking the weather to see if we need to pack an umbrella or hat. But, when it comes to business, how do you know things are going well? This is where business reporting comes in.
To succeed, you need to rate your performance with cold, hard data — not guesses.
But there are a million things you can measure and there's a danger of getting lost in the data. What you need to do is decide which numbers matter most to your success. These are often called KPIs (key performance indicators).
In this blog, we’re going to look at which KPIs you should include in your small business reporting.
What is a KPI?
A key performance indicator or KPI is a quantitative measure that businesses use for their business reporting. A KPI tells them how effective their efforts are.
For example, if you sent out an email to your customers to share an event you have coming up, you would want to see how successful the email was.
You would look at things like how many people:
- Opened the email (open rate)
- Clicked onto the link (click-through rate)
- Registered for the event (conversion rate)
Open, click-through and conversion rate are three examples of marketing KPIs. Anything you can quantify, you can measure.
What does a KPI look like?
To ensure a KPI is useful, it should be:
- Relevant: The best metrics are those that have the most impact.
- Realistic: The KPIs should be achievable and broken down into short and long-term KPIs.
- Relatable: Everyone in the business should understand the purpose of the KPI and what it means.
Typically, financial KPIs come from the information in your accounting software. Other KPIs usually come from your website and analysis tools such as Google Analytics.
Why are KPIs important for small businesses?
KPIs are like a blood test result. The test shows how healthy your body is against indicators like iron and cholesterol levels. Without getting a test done, it is hard for a doctor to put together a treatment plan.
The same goes for your business.
If we are unaware of a problem in our finances or operations, it won’t be easy to sustain the business.
By measuring and keeping up-to-date on your KPIs, you can better position yourself to make crucial decisions based on the data rather than gut feel.
What to measure in your business reporting
A KPI can be created for just about anything — as long as it can be counted. In terms of what to measure in your business reporting, you need to think about what is essential.
Your accountant can help you decide what business metrics you should consider. When they advise you about this, they will consider:
- The size of your business
- The industry you are in
- What your business goals are
- Business expenses and revenue
Related: Pricing strategies that will improve sales
KPIs used most often in business reports
It’s up to you to determine what KPIs are best for your small business. Here are some common KPIs used by small business and what each means.
Cash flow forecast
The cash flow forecast assesses whether the sales margins are appropriate or if they need to be adjusted.
This looks at how much cash is coming in and out of your business.
Without having your cash flow under control, it’s easy to go bankrupt — even if there’s a ton of demand for your product or service. Calculating your cash flow forecast can help you plan for the future and make sure you don’t get into a situation like this.
The formula is:
Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows
Gross profit
Profit is a measure of the financial earnings your business has made. Revenue is the total amount of income generated from the sale of goods or services.
Gross profit is a measure of your business’s revenue minus the costs. This is perhaps the most critical metric to include in business reporting. If you find you’re not making a profit — or at least breaking even — you’ll quickly go out of business.
The formula is:
Gross profit = Revenue – Cost of Goods Sold
Revenue growth rate
Revenue Growth Rate shows how well your business grew its sales revenue over a given period.
The revenue growth rates compare the current sales figures (total revenue) with a previous period, usually quarterly or yearly.
When you calculate the revenue growth rate frequently, you can evaluate whether growth is increasing, decreasing, or staying steady.
The formula is:
Revenue growth rate = Business’s total revenue for the current year / total revenue from the previous year.
Inventory turnover
The inventory turnover looks at the number of units sold or used within a given period. It’s a valuable thing to include in business reports, because it shows your business’s ability to move goods.
It’s in your best interest to have a high inventory turnover rate. Otherwise, inventory will go out of date, become irrelevant, or you’ll have to move it along by slashing prices.
The formula is:
Inventory turnover = (Total cost of inventory) / (Total value of the inventory remaining at year’s end).
Market share
Market share gives you insight into what percentage of sales your business makes in your industry.
This KPI shows how well your business is doing against other businesses in the same sector. If your market share is high, that means you’re competing well.
The formula is:
Market Share = (Your Business’s Sales / Total Industry Sales) x 100.
Accounts payable turnover
This KPI measures the rate you can pay your suppliers. Knowing these figures helps determine whether you should continue with some of the suppliers or start looking around for a less expensive source.
The formula is:
Accounts payable turnover = (Total cost of total supplier purchases) / (average accounts payable).
Customer satisfaction
Customer satisfaction is another metric that often shows up in business reporting. If your customers aren’t happy, they won’t come back. Any downtrend in customer satisfaction is a big red flag that something needs to be changed.
Customer Satisfaction Rating, or Customer Satisfaction Score (CSAT), measures how happy customers are with your product or services.
The formula is:
Customer satisfaction = (Sum of all the scores) / Number of respondents.
What KPIs will you track?
No matter how small your business, the most successful businesses use KPIs to help them measure success. You should choose KPIs that make sense with your business strategy so you can evaluate your progress, take measures to improve and set new goals.
There are many KPIs you can watch, but we recommend keeping it as simple as possible. Start with the seven above to keep your business on track.
