Invoice Bazaar Blog

What KPIs must small business owners track as a health check of their business?

By Invoice Bazaar | July 30, 2022

KPIs are key performance indicators that reveal how well a company is doing in relation to its goals. They can influence and drive change within an organization, as they provide a way to track progress and identify areas where improvements need to be made or firefighting needs to be done. By tracking KPIs, a business owner becomes aware of the adjustments in strategy required to keep the business healthy. This is important because rather than wondering why your business is turning its wheels but not making any profit, you can drill down to the actual reasons and take remedial action. It is common for small business owners to get buried in work and lose view of the big picture. That is where the tracking of KPIs gains enormous significance.

Even if your business seems sound and is making expected profits, KPIs help discover new opportunities and find what can further fuel your growth. However, many key performance indicators (KPIs) are used in the industry for different reasons, and it can be tough to narrow down the field to what’s most important. Here are a few tips: Think about what you want to measure. What are your goals? Look at industry benchmarks and compare your KPIs to see where you stack up. Talk to your team and get their views about which KPIs are the most important. By considering these factors, you can start to narrow down the field of KPIs to those that are most important for your business. 

As a small business, you must constantly evaluate your costs, set prices that cover your expenses and look for ways to increase revenue. And KPIs will show you data on where you need to make changes or improvements. Tracking KPIs can seem overwhelming because there are so many of them. So, small businesses can take a top-down approach and first cluster KPIs to find the essential KPI groups. Then decide which KPIs to focus on within each group. Four KPI groups can help improve your business. They are financial, customer-centric, internal process related, and employee-oriented. KPIs in each group can be used to measure progress and identify areas of improvement. You can make data-driven decisions to help improve your business by tracking the correct KPIs.

KPIs are tightly integrated into your business goals. For example, if your business is focused on short-term gains, then generating maximum sales revenue may be its most important goal, and tracking sales metrics and KPIs may be your priority. On the other hand, if your business focuses on long-term growth, growing your client base may be your topmost priority, so KPIs like your churn rate will be significant. Another thing is that you need continued employee support for your company to survive and grow. So, as a small business owner, one of your top priorities will be employee retention and attracting new talent. So, employee turnover is something you’ll have to keep an eye on.

You’ll need to watch every metric that can help accurately predict and make a cash flow forecast. Metrics and KPIs like customer acquisition and retention costs are things you can’t do without. Most importantly, you need to check five KPIs – revenue growth, customer acquisition and retention, employee productivity, operating expenses, and cash flows – to ensure your business is on the right track. Among financial metrics, gross profit margin and current accounts receivable are two important KPIs to observe closely. And in the case of a health check, inventory turnover, accounts payable turnover ratio, and accounts receivable turnover ratio need to be tightly monitored.

Furthermore, among financial KPIs, working capital turnover and fixed assets turnover are two important KPIs that many small businesses downplay in favor of other urgent signals. But these two ratios can give indications of serious issues. When looking at growth from a broader perspective, market share and relative market share are always on the top of the mind of entrepreneurs. But from an income perspective, the primary things they’d like to ascertain may be revenue per customer, revenue per product/service, monthly recurring revenue, or revenue per employee. From an operative perspective, payroll and cost of goods, on-time delivery rates, and vehicle and driver utilization will be necessary.

For a small business focused on immediate or short-term growth, KPIs like customer satisfaction, average monthly leads, social media engagement, content marketing ROI, employee happiness, month-over-month growth, year-over-year performance, or attrition rate may be more critical. It will also focus on return on ad spending (ROAS), marketing qualified leads (MQLS), sales closing ratio, sales cycle length, and the average cost per lead. But when it comes to business health checks, your customer churn rate and employee turnover may be your most important KPIs. If your churn rate is significantly higher than average, it may indicate a problem with your product or service. Conversely, a lower-than-average churn rate could mean that you are doing something right and retaining more customers than your competitors. Sales KPIs are, of course, crucial to the point of overriding almost all else. If you want to increase revenue, metrics like total sales, conversion rate, and average order value would be essential to track. To improve customer satisfaction, metrics like customer retention rate and net promoter score would be the key. Ultimately, the best way to determine which KPIs are most important is to experiment and see what works best for your team. Because small business goals and priorities change with time, and for modern businesses, meeting those strategic goals, rather than constantly turning a profit, defines when a company sees itself as healthy or not. It’s not always about generating quick or high profits but about meeting strategic business goals.