Discover for yourself whether you are tracking the three most important KPIs.......and if not, learn how to start doing so.
The only way for a business owner to know if their company is meeting its goals is to define and track key performance indicators (KPIs).
How do you even come up with the right KPIs to track?
There are two groups of KPIs that every business should track, ones that are industry-specific KPIs and ones that are universal KPIs.
This article is about the three universal KPIs that are essential for every business.
1. Profit Margin
The gross profit margin is one of the most critical KPIs; after all, the profit motive drives most businesses since if there is no profit, there is no business.
However, some companies make the mistake of spending way more than they earn. While this is okay in some stages of a business, it can spell trouble in the long run. That is why it is important to keep an eye on your gross profit margin. Here is how to calculate it:
Divide the gross profit by gross sales. The number you get is the fractional profit margin, which you can multiply by 100 to express in percentage.
If your profit margin is going up, that is great. However, if it is lower compared to the same quarter of last year, maybe it is time to make a change.
There are two ways to increase your company’s profit market, and they have to do with the gross profit formula: gross sales minus cost of sales (COS). So, you can either decrease COS or increase sales (at constant or a smaller increase in COS).
You can accomplish the former by cutting costs and saving money on suppliers, utilities, and such. As for the latter, you can improve your products or services so you can raise prices.
2. Revenue Ratio
How can you tell if your business is going in the right direction?
Your revenue ratio is an effective way to measure your company’s growth in a particular period.
The revenue ratio is the ratio of the current period’s revenue compared to the same period of the year before. It shows how fast your revenue is growing, and the best way to increase this ratio is to increase sales or revenue.
If the revenue ratio is higher than 1.0, your revenue is growing. The higher it is, the faster your company’s revenue growth.
3. Conversion Rate
The Internet has enabled business owners to track conversion rates more precisely than ever. If you are spending money on ads, for example, it is essential to find out which ads work and which ones do not.
It is also possible to calculate the conversion rate for anything, not just paid ads; it could be the percentage of people who clicked on your link or bought your product, for instance. To do so, calculate the conversion rate by dividing the number of conversions by the total number of leads (those who saw your ad, for example).
Conversion rates give powerful insights and they can help optimise or fix things.
Summary
Critical KPIs can vary based on your specific type of business; the ones mentioned above are universal ones. Tracking these and other industry-specific KPIs will let you gain insight into the state of your business, enabling you to devise strategies to enhance its profitability further.
