Measuring Profit Yardsticks for Your Small Business After a Bad Economy
One of the challenges of running a small business, especially during tough economic times, is understanding your business performance measurement. What are the right measures of success in business, and how can you determine whether or not your business is on the right track?
There is no one simple “right” answer for this. Different companies and industries have different relevant financial KPIs for small businesses. Depending on the age and growth stage of your business, you might have different standards for measuring your business’s performance. It’s not always as simple as measuring your business revenue or profitability. You might be having a tough year of declining sales revenue due to a sluggish economy, but still have many areas of positive improvement to feel good about.
Here are a few ideas and insights for how small businesses can think about business performance measurement in a way that helps you stay clear-headed about your business prospects, while also adapting to challenges along the way.
Choose the Right Financial KPIs for Small Businesses
Key Performance Indicators (KPIs) are measures of success in business.
Some of the most common KPIs include:
- Cash flow forecast: How much money do you have coming into your company (sales revenues) vs. money going out of the company (costs of doing business, rent, equipment, inventory, payments to suppliers, etc.)? Doing a regular cash flow forecast helps you stay on top of your business performance.
- Gross profit margin as percentage of sales: How profitable is your business? Divide your gross profit amount by your total sales.
Different types of businesses might want to use different KPIs, as not every metric is relevant to every business or industry. Here are some additional ways to measure your business success and profit.
Brick-and-Mortar Retail KPIs
If you run a brick-and-mortar retail business, you might want to measure KPIs such as:
- Sales per square foot: How much revenue you are earning for each square foot of retail store space.
- Average transaction value: How much money customers spend (on average) with each purchase.
- Inventory turnover: Number of units of products sold in a certain time period. Measure this by adding up the cost of inventory that has been sold, and then divide that by the total value of inventory that’s remaining at the end of the year.
If you run an ecommerce business, or if you sell online as well as from a retail storefront, you should include other retail KPIs such as:
- Website traffic: How many people are visiting your website? How long are they staying? Are you seeing a growth in traffic or declining traffic? Are you getting traffic for your most important SEO (search engine optimization) keywords, and are you seeing results from your online marketing activities? Paying attention to the performance of your website can be one of the most important KPIs to follow.
- Conversion rates: How many website visitors ultimately “convert” to a sale and buy from you? You can also use conversion rates for a variety of sales metrics by taking a closer look at your overall sales process. For example, if a prospective customer comes to your website, what is the next step that you want them to take? Do you want them to sign up for a product demo, sign up for your email list or take other steps that are between “first introduction to your business” and “closing a final sale”? Pay attention to each stage of your sales funnel and see where you are losing people or gaining new buyers.
Other KPIs for Customer Loyalty and Retention
Sales revenue and profit margins are important, but along with looking at your top line and bottom line numbers, you should consider some other KPIs that help paint a fuller picture of your business performance. For example:
- Customer retention: What percentage of customers buy from you more than once? Repeat business is often more valuable than new business because it costs less to keep a customer than to find a new one.
- Average time to sale: How long does it take to make a new sale, starting from the first point of contact with the customer?
- Cross-selling and up-selling: When you have a relationship in place with a customer, how proactive are you being in selling additional products or services to that customer? And are you suggesting higher-value products and services to that customer?
- Total lifetime value of a customer: How long do you typically keep a customer? If you are a brand-new business, you might not have much data on this yet, but if you’ve been in business for a few years, hopefully you have some long-time, repeat customers. If a customer buys $1,000 worth of products or services from you per year and stays with you for five years, that is a lifetime value of $5,000 per customer.
What to Do If Your Business Is Struggling
By some of the most conventional metrics, your business might be struggling. Maybe your profits are down, or maybe your sales are sluggish. However, keep in mind that top line revenues or bottom line profits are not always the full story of what’s happening with your business. Take a closer look at some other KPIs to get a better understanding of which trends are driving your business.
For example, maybe you are struggling to close the sale at the end of your sales funnel — maybe shoppers are abandoning their shopping carts or maybe your website needs a redesign. Is your website traffic down? Maybe you need to boost your efforts at advertising and SEO to get more visitors to your site. Have your costs of doing business gotten out of control? Maybe you need to take a closer look at your business expenses and cut back on unnecessary spending. Are you doing enough to reach out to your current customers to ask for repeat sales? You might be sitting on a gold mine of repeat sales and referral business if you put more effort into building relationships with your existing customer base.
Numbers don’t lie, but they can sometimes be misleading. If your business profitability is not where you want it to be, don’t assume that the situation can’t be fixed. Take a closer look at your business performance, dig deep and keep building relationships with your current customers.