Business KPIs, short for key performance indicators, provide you with a snapshot of your company’s health. On this page, we’ll walk you through some of the most important business KPIs, formulas to calculate them without needing any special software, and how to improve them if needed.
Why Monitoring KPIs is Important for Business Success
If you’re keeping a pulse on your KPIs, you can spot issues before they impact business health and address problems while they’re still small. Knowing your KPIs, monitoring them, and taking steps to improve them also helps your business grow stronger over time. You can make more informed decisions and reach your goals faster.
General Company KPIs to Monitor
First, let’s start with some business KPIs that can help you determine how your company is performing on the whole.
In today’s data-driven age, people often look at productivity at the individual level, such as how many projects someone has completed or how many keystrokes they make in the average day. These are important measures, but they typically require specialized software and don’t always help you identify if you’re achieving KPIs that impact your business as a whole. Instead, managers and leaders can use readily available data to see if the company, as a whole, is productive.
How to Measure Company-Wide Productivity
Partial Factor Productivity = Output ÷ Input
Partial factor productivity is one of the simplest calculations to perform. You simply add up all output, such as completed goods or sales, and divide it by the input, which is comprised of labor, materials, and other costs. Anything less than 1.0 means your company is consuming more resources than it’s producing. Anything greater than 1.0 means it’s productive. The greater the figure, the more productive the company is.
How to Improve Company-Wide Productivity
You can improve company-wide productivity by reducing the input or increasing the output. For example, the input may be reduced by scaling back your team, saving money through automation, or working with less expensive suppliers. Output can be increased through scaling operations or reengineering business processes.
Customer satisfaction is an indicator of long-term business success. After all, happy customers will likely stay with you, purchase more, and refer more customers to you.
How to Measure Customer Satisfaction
One of the most trusted methods for measuring customer satisfaction is the net promotor score (NPS). Calculating it relies on asking your customers one question: “On a scale of 0-10, how likely is it that you would recommend [company name] to your friends, family, or business associates?”
Anyone who rates your business 0-6 is considered a “detractor.” They’re not happy with your company and aren’t likely to stay with you long. Anyone who rates your business a 9 or 10 is considered a “promoter.” These are your fans who are likely referring new clients to you already. Those in the middle with ratings of 7 or 8 are considered “passives.” They’re either indifferent or could go in either direction depending on their latest experience with your company.
NPS = % of Promoters – % of Detractors
How to Improve Customer Satisfaction
Send out NPS surveys and include the option for customers to explain why they gave the rating they did. Take action on any trouble areas promptly.
Keeping your existing customers active is critical to the long-term health of any company. Just a five percent increase in retention can increase revenue by 25 to 95 percent, per Bain & Company. Their research shows that existing customers buy more often and spend more than newer customers too. Plus, it’s six to seven times more expensive to acquire a new customer than it is to keep one, per Amex research.
How to Measure Customer Retention
Retention Rate = (((# of Customers at End of Period – # of New Customers Acquired During Period) ÷ # of Customers at Start of Period)) X 100
This is often calculated on a monthly, quarterly, and yearly basis.
How to Improve Customer Retention
Start by keeping a pulse on customer satisfaction with internal surveys and tracking online reviews, then address any issues you hear. Loyalty programs and marketing campaigns will also help.
It costs up to two times an employee’s salary to replace them, per Gallup research. Departures hurt morale and can impact productivity and profit too. In other words, if you’re going to monitor business performance, the importance of this metric cannot be overstated.
How to Measure Employee Retention
Employee Retention = (# of Employees Employed During Full Period ÷ # of Employees at Start of Period) X 100
How to Improve Employee Retention
More than half of all employees who voluntarily leave their jobs say the company could have done something to convince them to stay according to Gallup’s research. Talk to team members when they submit notice and find out if there’s a way you can work together to resolve their concerns. You can perform exit interviews to identify additional opportunities to make corrections as well.
Most importantly, try to address issues before they start. Maintain a positive work environment in which people feel valued and can contribute. Perform regular surveys to gauge employee happiness and make corrections quickly if problems surface.
Financial KPIs to Monitor in Your Business
Even if your company is absolutely nailing all general business KPIs, it’s still not going to survive long if you’re not financially strong too. A few money-related metrics to track are provided below.
Net Profit Margin
Net profit margin helps you determine whether your income is greater than the cost of running the business. It’s a predictor of long-term business growth too.
How to Measure Net Profit Margin
Net Profit Margin = Revenue – Sales Expenses
This is usually measured monthly but may also be tracked across longer periods.
How to Improve Net Profit Margin
Net profit margin can be improved by either increasing revenue or by decreasing expenses. For example, you might raise your prices and sell more to increase revenue. Or, you might decrease production costs by working with a supplier who charges less for raw goods.
Sales Growth Rate
Many things, from your customer experience to the quality of your products or services, influence your sales growth rate. Businesses that lack in virtually any area will eventually start to see a decline in growth, while healthy businesses will see continued growth. That makes it one of the most important business success measures you can track.
How to Measure Sales Growth Rate
Sales Growth Rate = (Current Period Net Sales – Previous Period Net Sales) ÷ Previous Period Net Sales X 100
Businesses don’t usually see dramatic changes from one month to the next, though running the calculation makes it easier to see if you’re heading in the right direction. You’ll see clearer signs of sustained growth when it’s calculated on a quarterly or annual basis. An alternate formula for year-to-date growth can be helpful as well, especially for startups and businesses experiencing rapid growth.
How to Improve Sales Growth Rate
Growth is spurred by business expansion strategies and marketing. For example, you might invest in developing more referral partnerships. This tactic is especially effective because referred clients close more often and more quickly, plus bring in 16 percent greater profits per Annex Cloud.
Are you investing your resources into the activities that generate the most revenue for your business? Should you be diversifying risk more? That’s what measuring revenue concentration will tell you.
How to Measure Revenue Concentration
Revenue Concentration = (Revenue by Customer or Project ÷ Total Revenue) X 100
How to Improve Revenue Concentration
Revenue concentration doesn’t necessarily have to be “improved” like some other business KPIs. It’s used more to help refine your strategy. For example, suppose Customer A is bringing you 25 percent of your business, and no other customer tops five percent. In that case, it’s worth devoting more sales, marketing, and customer service resources to that single account. Equally, you’ll probably also want to try to attract more new customers. It’s risky to have so much of your revenue coming from a single source.
The same is true of your products. If one product is responsible for 75 percent of your revenue, that’s where you want to apply the lion’s share of your resources.
Accounts Receivable Turnover
Your accounts receivable turnover tells you how quickly you’re collecting payments from your clients. The higher your number is, the better your cash flow is and the more able you are to address your daily expenses.
How to Measure Accounts Receivable Turnover
Accounts Receivable Turnover = Net Annual Credit Sales ÷ Average Accounts Receivable
How to Improve Accounts Receivable Turnover
There are many ways to improve your accounts receivable processes. For example, digitizing your invoicing and payment processes reduces billing errors, plus makes it easier for customers to pay, so your business gets paid faster.
The cash your business has on hand to cover operating expenses is referred to as net working capital or NWC. It’s important to have sufficient funds for things like supplies and payroll. However, having an NWC surplus isn’t always good, either.
How to Measure Working Capital
Working Capital = Current Assets – Current Liabilities
How to Improve Working Capital
If you have an NWC surplus, it’s worth investigating ways to put the money to work for you. For example, you may want to invest in more marketing and other growth initiatives that can help your business expand.
If your net working capital is low or negative, your business needs to find ways to start generating cash quickly. This can mean increasing sales, improving your invoicing process, taking out a loan, or accelerating B2B payments with a solution like invoice factoring.
Viva Capital Can Help You Maximize Your Business Performance
Whether you’re short on working capital, your accounts receivable turnover is lacking, or you need cash in order to invest in areas that will help you improve the business KPIs outlined here, Viva can help. We provide a variety of tailored small business funding solutions, including invoice factoring. To learn more or get started, request a complimentary rate quote.
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