A simple and effective way to better understand your company’s operations is to use key performance indicators.
Key performance indicators (KPIs) are metrics that measure the performance of your organization against certain benchmarks. You can use key performance indicators to set goals and measure progress throughout the course of your business’s life cycle. There are numerous metrics that you could use, but this post will cover two main categories of KPIs: financial-related KPIs and operational-related KPIs. We will highlight a few common metrics within these two categories so you can learn how to benchmark your business’s operations more effectively, and – in turn – better lead your company.
Net Profit Margin
Net profit margin is a metric that can be used to measure how efficiently your company is operating. To calculate this value, simply take net profits for a specific period (revenue, less cost of goods sold, less all other expenses) and divide it by the total revenue of that same time frame. The result will be your net profit margin.
Knowing your net profit margin can be helpful to compare against industry benchmarks. Additionally, seeing how you company’s net profit margin changes over time can help you determine if your business strategy and operating decisions have been effective. For example, you can see if investing in a new product, hiring more employees, increasing marketing efforts or distributing your products across new platforms contributed to the growth and profitability of your company or if you need to make changes moving forward.
Actual Revenue vs. Forecasted Revenue
Actual revenue vs. forecasted revenue is a financial-related KPI that can be used to measure how accurate your revenue projections have been. If actual results are greater than forecasted, you and your leadership team will want to understand why business was better than projected. If actual results are less than forecasted, you can determine what needs to be done to improve your company’s performance.
If the difference between your forecasted and actual revenues is way off base in either direction, it’s time to reevaluate your business or change the way that you predict future revenue. Finding the disconnect between the two numbers will help you eliminate inefficiencies or curb overspending.
Profit Per Employee
Profit per employee is a financial metric that can be used to determine if you have too many or too few employees to lead, manage and operate your business. This value shows how much profit is brought in per employee, so it gives you insight into whether your employees are doing their jobs effectively.
To calculate this, you’ll take net profit and divide it by the number of full-time employees. A larger result yields greater profit per person. A good profit per employee will depend on your industry, so do some research to know what benchmark to strive for.
You can apply this same type of metric – i.e. profit per [any measurable item] – to help you make decisions. For example, profit per square foot can help you see if you’re utilizing your workspace, and profit per customer helps you see how each customer contributes to your bottom line. Select the KPI that provides you with the information you’re looking for so that you can have a more thorough understanding of how your business operates on a regular basis.
Daily Cash Balance
Your daily cash balance is a way to measure your company’s success as it relates to cash flow. And truthfully, there may be no more important KPI than knowing your daily cash balance. This metric tells you how much money is in the bank on any given day and if that cash is sufficient to support your projected operations.
We consider daily cash balance as one of the most important metrics because without adequate cash to operate you won’t be able to sustain continuing operations. At that point, all other KPIs will be irrelevant.
If you’re struggling to maintain a positive daily cash balance, find what the hurdle is. Do you have too many employees or not enough customers? Are your products or services appropriately priced? How quickly are you collecting payments? Asking these simple questions can help you see ways to improve your daily cash balance.
READ MORE: Cash Flow Series: How Cash Flow Forecasts can Help your Business
Growth rate is an operational-related KPI that can be used to measure your company’s success over time. This metric tells you how much growth or shrinkage there has been for the period being measured. It can measure the growth of just about anything: revenue, profit, new clients, new products, etc. To determine growth rate, take the current value less the past value, then divide the result by the past value. This will show a percentage growth from the prior period.
Growth rates are very individual. Not only will they vary by industry, but they will vary based on what is important to you and the rest of the management team. For instance, you might want to:
- See how well a new product is selling,
- Figure out if a new service you’ve added is being requested,
- Learn how many new clients you’ve obtained and at what points of the year they’ve come on board,
- More clearly see revenue growth year over year,
Or anything else that’s important for you. If you’re not growing as quickly as you had wished or in alignment with industry standards, it might be time to step back and either change your growth rate goals or adjust your business strategy to positively impact that percentage.
80/20 Customer Model
The 80/20 customer model is a type of KPI that can be used to measure which customers are truly important to your business. The idea behind this concept is that 20% of your customers often produce 80% of your revenue. If you know who your most loyal customers are, you can focus on making those customers happy.
Though the 80/20 rule is often used as a thought experiment when making decisions, you may be able to measure it depending on your business. You can find your best customers by determining your total sales for a period, running a report for total sales by customer, and identifying which customers accounted for the largest percentage of your sales. From this information, you can see what products or services your best customers utilized. This information can help you decide how to change your offerings going forward in hopes of attracting more high-value customers.
The Importance of Using Key Performance Indicators in Your Business
You cannot manage what you cannot measure. As an entrepreneur or company leader, key performance indicators can help provide strategic insight into how your business is performing every single day and where improvements need to happen. There are many different types of KPIs to use, but it’s essential to only use calculations and metrics that make sense when considered in light of your business objectives. Our team at Landmark can assist and advise you on metrics and benchmark data appropriate to your specific business. Contact us with any key performance indicators questions you have.