Navigating without Key Performance Indicators (KPIs) is risky. KPIs help monitor your business’s health and guide your strategic decisions. Choose the right ones to enhance performance and profitability.
Selecting Effective KPIs
Choose KPIs that directly impact your goals. Avoid basing your choices on easily accessible data, which can lead to irrelevant metrics. Focus on your business’s unique strengths and weaknesses to address specific issues effectively. Get your team involved for broader insights.
Cash Flow
This measures the net amount of cash and cash-equivalents moving in and out of your business. Keeping a close eye on cash flow helps you evaluate whether your sales and profit margins are healthy, ensuring sustainability and the ability to fund operations, expansion, and investments without external financing.
Gross Profit Margin
This KPI helps you understand how much money is left after subtracting the costs of goods sold (COGS) from your total revenue. It’s crucial for assessing the financial health of your business, showing you how much you are earning compared to how much you are spending on production or service delivery.
GPM = (Revenue – Cost of Goods Sold (COGS)) / Revenue *100%
Drop Off Rate
This tracks where and when potential customers exit your sales process before making a purchase. Understanding the drop-off rate helps you identify weaknesses in your sales funnel, allowing you to make necessary adjustments to improve customer conversion rates.
Drop-Off Rate = (# of Users who Completed the Last Step – # of Users who Completed the First Step) / # of Users who Completed the First Step *100%
Revenue Growth Rate
This indicator measures the rate at which your business’s revenue is increasing or decreasing over a given period. It’s essential for assessing whether your business is expanding, stagnant, or in decline, helping you to strategise appropriately for future growth.
RGR = (Revenue in Current Period – Revenue in Previous Period) / Revenue in Previous Period * 100%
Inventory Turnover Rate
This measures how quickly you sell and replace inventory within a certain period. High turnover indicates strong sales and effective inventory management, while low turnover might suggest overstocking or issues with product demand.
Inventory Turnover = COGS in Period / Average Inventory in Period
Accounts Payable Turnover
This KPI shows how often you pay off your suppliers. Regular monitoring helps manage how efficiently you are using your available cash to settle debts with suppliers, which can also affect your relationships with them and your ability to negotiate favorable terms.
A/P Turnover = Supplier Purchases in Period / Average A/P in Period
Accounts Receivable Turnover
This ratio indicates how effectively your business is collecting earnings from customers. A high turnover rate suggests that your business is efficient at collecting money owed, which improves cash flow, while a low rate may indicate problems in your collection process.
A/R Turnover = Credit Sales in Period / Average A/R in Period
Relative Market Share
This metric compares your market share with that of your competitors, offering insight into your competitive position. A higher market share relative to your competitors can suggest stronger market influence and potentially greater market power.
Relative Market Share = Your Market Share / Market Share of your Top Competitor
Repeat Purchase Ratio
This shows the percentage of customers who have made more than one purchase. A high ratio is an indicator of customer loyalty and satisfaction, suggesting that your products or services are well-received enough to encourage repeat business.
Repeat Purchase Ratio = # of Repeat Purchasers in Period / Overall Customer Base in Period
Churn Rate
This measures the rate at which customers stop doing business with you. A lower churn rate indicates higher customer retention, essential for maintaining revenue and reducing the cost associated with acquiring new customers. High churn rates can alert you to underlying issues in customer satisfaction or service quality.
Churn Rate = (# of Lost Customers in Period / # of Customers at Start of Period) * 100%
KPIs are not just about tracking numbers—they are about making those numbers work for you to enhance business operations, customer relations, and ultimately, your bottom line. By carefully selecting and monitoring the right KPIs, you can steer your business towards sustainable growth and readiness for a lucrative sale. Embrace KPIs as your strategic tools to unlock the full potential of your business.
