How do you measure business success? That answer may differ depending on where your business is in its lifecycle or which industry you operate in. For start-ups, revenue growth is key, while a more established business may focus more on profitability.
That said, there are five key performance indicators (KPIs) that every small business should know. Nkululeko Nombika, business operations director for Sage Africa, Middle East and Australia-Pacific takes a closer look.
1. Sales revenue
Revenue is an important measure of success because it reflects the demand for your products or services. The money generated from all customer purchases is called sales revenue. Returns or undelivered services are subtracted from this income to get the final sales revenue result. Other important revenue KPIs are:
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- revenue per employee, which allows you to quantify the productivity and value of an employee.
- revenue growth rates, which show you how sales are growing or declining over a time period like a month, quarter, or year.
2. Net profit and net profit margin
Net profit, also known as the bottom line or net income, remains after deducting all expenses from sales revenue. Your net profit margin is an essential indicator of the financial health of your business. The percentage of net profit created by your company’s revenue is your net profit margin.
If you notice that your margins are small or haven’t improved over time, you may need to boost your prices or rethink how you promote your product or service to grow appropriately.
3. Gross profit and gross margin
Gross profit reflects the direct costs involved in making a sale, such as materials, direct labour needed to fulfil a service or make a product, commission for salespeople, and shipping. It excludes fixed costs like back-office employees and rent.
Gross profit margin is a metric that indicates how well a product, or a group of items performs in your business. You can fix any potential weakness in your business before it becomes an issue by keeping an eye on your gross profit margin.
4. Cash flow
Making sales and achieving your margins are important, but they’re not enough. You also need to ensure that you have a healthy cash flow. Cash flow is money flowing in and out of your bank account – the income you are receiving via customer payments, interest, and other sources versus the money you spend on business expenses.
It’s one of the most important measures of a business’s health since a business can record significant sales yet run out of cash because it needs to pay expenses before its customers pay up. Using your accounting software for cash flow forecasting can help you to understand the flow of money in and out of your business so you can plan accordingly.
5. Customer acquisition cost
Many companies are so focused on closing a sale that they forget how much money was spent to acquire the customer in the first place. Customer acquisition cost is calculated by dividing all expenses spent on acquiring a new customer by the number of customers acquired in a specific timeframe. Keeping a low customer acquisition cost is critical to scaling your business.
By constantly evaluating the KPIs that are tied to your business’s goals, you can ensure your company is always growing. You’ll also be able to identify issues and correct them before they have a negative impact.
By automating repetitive, low value activities and leveraging software solutions to get real-time visibility into your operations, you will be able to track your KPIs effectively. Today’s cloud-native financial solutions offer powerful analytic capabilities that give you access to business insights to support better decision-making, helping you grow your business.
- Nkululeko Nombika is the business operations director for Sage Africa, Middle East and Australia-Pacific. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Ventureburn.
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