Overhead, ROI, and more. What are the key performance indicators you should track in your business?
As a business owner, it’s no secret that you wear many hats on the regular. Especially if you’re starting out, but really, all throughout your entrepreneurial journey, you’ll be constantly wondering about your business’s health, whether you’re focused on the right metrics, and how to make sure you’re meeting all those hefty goals of yours.
A key element in looking out for your business health is keeping track of the stats that truly represent your business growth, financial state, and sustained growth.
Looking for some business inspiration? Check out 5 Growth Strategies Used By The Most Successful Companies
What are Key Performance Indicators?
While we can all agree that most entrepreneurs go into business for a lot more than money, an unsustainable business is something no one wants to be caught up in.
Often known as KPIs, your key performance indicators are your business’ vital signs. Things like your revenue, profit margins, and conversion rate are the numbers that speak directly about how your business is doing financially and in terms of customers.
Of course, money is not the only thing you want to be aware of. So what other KPIs should you look out for?
12 KPIs you need to track in your business
Lead generation: How many new leads are you generating in a week? A month? This number is key. Your leads are every potential new customer you encounter, and a percentage of them goes on to become your paying clients. It’s important to track your lead generation because when you know exactly where your leads truly come from, you know how to invest your resources to reach this audience.
Conversion rate: How many of the people who enter your funnel end up buying from you? By tracking your conversion rate, you can spot trends in which of your offers sells the best, whether your offers are seasonal - if they sell more close to tax season, for example -, which of your income streams is more profitable or efficient, and a lot more information to hone in on what’s most sustainable and growth-oriented in your business. Take note, you don’t necessarily have to drop everything that has a low conversion, but you want to be aware of this stat in order to make the best decision moving forward.
Customer retention: Depending on your business, you’re probably hoping clients come in and stick with you long term. Don’t we all? Your customer retention rate is the percentage of paying customers that’s stayed with you for a specific period. Its opposite is the churn rate, or the percentage of clients who unfollow or disengage from your business within the same timeframe. Many business owners, especially in startups, equate a huge amount of clients with a fast track to growth. But this isn’t always the case. Streamlining your products may mean a smaller, but way more loyal pool of customers for your business in the long run.
Cost of acquisition: This is the money you’re investing in acquiring each individual client. This number is important because it helps you see the bigger picture of your business health. Related to the churn rate, the cost of acquisition affects your overall business because it is, on average, up to 5 times more expensive to sign a new customer than to keep an existing one happy.
Year over year (YoY) growth: This is a big-picture comparison in the state of your business over a one-year lapse. As your business gets older, you can compare yearly performance and trends will likely emerge. Is your business seasonal? Are big technological changes impacting you? Do specific events trigger growth or recession? If so, these will show up in your YoY growth comparison.
Return on Investment (ROI): You’re in business to make money. It’s that simple. If you’re burning through cash and your business is yet to be profitable, you’re either a startup or something’s going wrong. Your ROI is the number of dollars coming in as a result of every dollar you’re investing in acquiring new customers. In your marketing, for example, your ROI is the amount of money that comes in from a specific ad campaign or collaboration minus the amount of money you invested in the effort.
Inventory: If you work with physical products, keeping a tight inventory is key to your operations. You need to know exactly how much raw material, equipment, finished products, and packaging your business has at all times to keep track of the dollars you’ve invested in those.Likewise, when you offer a service or digital product, it’s equally important to keep track of what you offer, even if it may look different. For example, you won’t run out of digital downloads, but have you decided whether you want your prints to be available for a number of clients or you want to sell them to everyone? At what point does your digital offer cover its expenses? Perhaps you’ll want to offer a specific download until you sell enough units to get a 10x ROI?Another key aspect of your inventory is your equipment, including chairs, desks, computers, the software you use, and everything else you need to run your business. Tracking every one of your assets helps you accurately estimate how much money you’ve got tied to your business.
Average fixed costs: These are the costs of your business that don’t directly relate to how many products or services you sell. A classic example of Average fixed costs is rent - you will have to pay rent in your office space regardless of selling one or a thousand courses. Your Average fixed costs are also known as your overhead. Keeping your overhead in check is key to ensuring the profitability and long term success of your business.
Average variable costs: These are the costs of your business that directly relate to your sales. In a physical good, these would be materials, packaging, shipping, and the like. Of course, the more items you sell, the more AVC - like shipping and packaging - you’ll pay. Likewise, the more clients you have, the more expensive your cloud storage or other subscriptions may be.
Contribution margin ratio: For this one, you need to do two things: First, find your products’ contribution margin, which equals to your revenue minus your AVCs (Average Variable Costs). Once you’ve got your products’ contribution margin, you divide it between total revenue to calculate the total Contribution margin ratio of your product, which will be a percentage. Calculating your Contribution margin ratio helps you see how each of your sales affects your overall business and bottom line.
Breakeven point: This is the amount of product or service you need to sell to cover all of your business expenses. What comes above this number is profit.
Bottom line: This is probably one of the most thrown-around words in business, both online and off. Your bottom line is your business’s total income after subtracting its expenses from the revenue. In short, the cash you got at the end of the day.
A common mistake is to chase down vanity metrics like followers or newsletter subscribers. But these KPIs don’t bring much to the table in terms of business growth.
Once you’ve learned what KPIs you need to focus on and figured out an effective system to track your revenue, goals, and growth, it’s easier to pin the right strategy to keep your business moving forward.
