Keeping tabs on these metrics will help you track your recovery progress
As your business rebuilds, key performance indicators (KPIs) let you quickly check on how your company is doing. Bringing to light where you can improve is essential to moving forward and achieving your business goals.
Focus on these five KPIs to help steer your business toward higher profits and growth.
1. Gross profit margin (GPM)
One of the most commonly used metrics, GPM tells you how much money you’ve made after you subtract direct costs.
- To calculate your GPM, subtract your cost of goods sold from your monthly revenue. For example, RM15,000 of revenue less cost of goods sold of RM8,000 equals RM7,000 gross profit.
- Next, divide your gross profit number into your monthly revenue. In this example, RM7,000 divided by RM15,000 (multiply by 100) gives you a gross profit margin of 47%.
- Use your GPM to adjust your pricing and costs to maintain profitability. If you notice your GPM percentage has decreased over time you may need to reduce supplier costs or raise prices.
2. Net profit percentage
Lowering the percentage of costs compared to sales can help boost your profits.
- Calculate your net profit percentage by subtracting overhead costs from your gross profit margin. Using the above example, gross profit of RM7,000 a month minus operating expenses of RM5,000 (e.g. rent, employee wages, advertising, bank fees) might produce a monthly net profit of RM2,000.
- Divide RM2,000 into monthly revenue of RM15,000 for a net profit of 13%.
- Monitor your net profit to make sure your business continues to be profitable. If the number dips, you can do things like reduce payroll hours, move to a less expensive location, trim operating costs, and review equipment leases for a better deal.
3. Increase in revenue growth month over month
Monitor monthly increases to your business revenue to see if you are gaining or losing traction.
- Simply compare current month results to the previous month.
- For example, your business might generate RM15,000 of revenue in June and RM18,000 in July indicating a 20% increase.
- Your accounting software can generate a report for monthly revenue.
- You can generate more sales by selling more to existing customers, introducing new products or services, and acquiring new customers.
4. Customer acquisition cost (CAC)
This KPI helps you discover the cost of winning a new customer—and whether your marketing and promotions are paying off.
- To calculate your CAC, divide the cost of a marketing campaign by the number of new customers it attracted to your business. If you spent RM500 on a Facebook ad and gained 50 new customers your CAC is RM10.
- Naturally, you want to keep your CAC as low as possible. Monitoring this essential metric will show you how to get the most from your limited budget by investing in (and repeating) campaigns that generate the most leads.
5. Customer conversion rate
Conversion rate tells you how good you are at converting prospective customers into actual customers. It tells you how effective your sales funnel is by tracking how many prospects become customers so you can fine-tune your promotion strategies.
- Track your website conversion rate based on new subscriptions to your e-newsletter or number of contacts made by email, online form, or phone call. This is your number of prospective customers added to your database,
- For example, if your business reaches 500 prospects in a month and 50 of them become customers, your conversion rate is 10%.
Use Google Analytics to find out how many prospects visit your site and how long they stay. Average conversion rates range between 2% and 3%. You may decide to refresh your website with new images, compelling copy and an e-commerce section.
Reviewing these essential numbers every month allows you to know what’s working well as you rebuild, what could be improved, and how close you are to achieving your business goals.
Recommended Next Read
Accounting for entrepreneurs: Your eight-point survival guide