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Guide: The Best Financial KPIs for Small Businesses

10+ min read • Jan 25, 2021 • Grant Olsen

Whether you’re a hardcore sports fan or you’d rather run errands than watch a major league game, you have to admit that the sports world knows how to handle metrics. Pick any sport—they all have unique systems in place to analyze past performance, track current performance, and project future performance.

Just like with a pro athlete, your small business has plenty of data that can only be discovered through careful tracking. Without these metrics, you’ll never be able to identify weaknesses and fully leverage your strengths. Sure, you can always read over your balance sheet. But there’s so much more to the picture than just the basics of profit and revenue.

Among the most valuable elements in your business tracking toolkit are key performance indicators (KPIs). KPIs help you to measure the performance of your company, projects, and team members. Guided by this real-time data, decisions become more strategic, goals become more attainable, and your business keeps moving in the right direction.

“Big businesses have been using KPIs to measure their success for years,” explains financial guru Tim Clairmont. “Yet many small businesses ignore this less-understood acronym. Employees can measure their success by comparing the results of their KPIs over time. A manager can see if an employee is improving and if they are outperforming other employees by looking at their KPIs and tracking their results. But if you are self-employed or running your own firm, then who is there to tell you what your KPIs are? Are you letting your business run you, or are you running your business? Moving from salesperson to businessperson or moving from a small business to a larger business requires a change in perspective. And one great place to start is to figure out your KPIs.”

Of course, it’s not enough to say simply that your business needs KPIs—that’s as broad as saying that your business needs advertising. It’s only when you break down the details that you put yourself in a position to execute. Just like an advertisement can take a vast array of forms and appear on a nearly countless number of mediums, there are many potential KPIs to consider for your small business.

Choosing the Best KPIs for Your Business

Carpenter reviewing project

Before you can track the progress of something, you need to know where it’s headed. This means you should start the KPI process by identifying your key business goals. These goals need to be measurable and attainable in order for the KPIs to be relevant.

For example, let’s say you had the goal to make your business more appealing to younger customers. This idea is nice, but the goal is far too ambiguous to be effective. Here’s how you could dial it in more: “by the end of Q3, we’ll add 2,000 followers in the 17–25-year-old age range to our Instagram account and 2,500 followers in the same age range to our Facebook account.”

Armed with this specific goal, you could identify KPIs that would help you to track progress and see if your efforts are paying off. Each KPI would need to be complementary to this objective or it risks becoming superfluous. Here are 4 factors to consider as you look at potential KPIs for your business goals:

  1. Is it measurable?
  2. Is it actionable?
  3. Is it relevant?
  4. Is it going to help your bottom line?

All of these questions drive to the same point, which is to ensure that the KPI falls within the context of your business.

“In my decade as CEO of a digital marketing agency, I’ve never met a company yet that succeeded in creating a refined digital marketing campaign without first coming up with equally effective key performance indicators for the strategies,” says business leader Oganes Vagramovich Barsegyan. “I’m absolutely convinced that the key to choosing KPIs is to contextualize them with your business. You must match them not only to your goals but also to a host of other factors, such as your strengths and weaknesses and the life stage of your business.”

Now, a word of caution regarding your KPI selection process. There can be a temptation to chase taillights when it comes to determining which metrics are best for your business: you might notice that other small businesses are focusing on certain metrics and assume those would also be ideal for you to prioritize. But you’re always better off focusing on the unique needs and goals of your business. Sure, you can glean wisdom from what others are doing—but don’t assume that what works for another business will work for yours.

KPIs to Consider For Your Business

Carpenter talking to client over the phone

Before you can narrow down the best KPIs to drive your business goals, you need to know your options. Some KPIs are best applied to certain industries or business models, while others can have near-universal application.

Here’s a closer look at many of the most powerful KPIs for small businesses:

Web Traffic

Even if you own a legacy brick-and-mortar store, you clearly need a web presence in our modern world. Customers increasingly use the internet to research products and make purchases, so if you’re not available to them, their money won’t be available to you.

The importance of a website is obviously much more poignant for online businesses. By tracking web traffic, you’ll know how well you’re connecting with customers. Simply leverage a tool like Google Analytics and you can measure the effectiveness of your marketing, sales, and other initiatives.

Social Media Engagement

If social media is a core component of your business plans, be sure to keep a close eye on engagement—an even easier metric to track than website traffic. Most social media channels have built-in tools that allow you to measure the effectiveness of your posts and follower engagement.

Whether you’re analyzing how many comments you’re getting on certain posts or how many new followers you’re attracting each week, these stats represent the kind of customer momentum that can power you to new heights.

Customer Satisfaction

If you aren’t able to meet and exceed your customers’ expectations, they won’t remain your customers for long. A customer satisfaction KPI is crucial because it gauges your business’s current ability to meet customer needs, and this information then helps to forecast how the future will look.

The easiest way to track this metric is with an email survey, but there are other alternate methods, like customer panels. What’s important: pay close attention to the feedback and make improvements where necessary. If your customer satisfaction is trending upward, your overall business performance is likely to follow.

Net Promoter Score

Speaking of customer satisfaction and surveys, you should consider tracking your net promoter score. To get this metric, send an email to customers asking how likely they are to recommend your business to their friends and colleagues. The response is given on a 0 to 10 scale, with 10 being the best.

When your net promoter score is high, referrals are likely occurring organically. Your business will grow through the magic that takes place when your happy customers proactively bring more customers into the fold.

If your net promoter score is low, you should consider a follow-up survey to identify areas of concern. Customers who aren’t willing to refer you to their friends most likely have frustrations with your business. And if you ask nicely, they’ll probably let you know exactly where the problems lie.

Conversion Rate

Your business can have limitless prospects, but those won’t do much for you unless you convert them into customers. This metric can be critical because it allows you to measure the effectiveness of various sales, promotions, and marketing efforts.

Here’s the formula:

 

Conversions from a specific time frame ÷ Total number of visitors to site or landing page x 100% = Conversion rate

 

As your business matures, you’ll want to refine your conversion efforts continually. These refining efforts will allow you to get the biggest bang for your buck.

Customer Acquisition Cost

Sales are the lifeblood of your business, and there are no sales without customers—so bringing in new customers is an essential aspect of your business. But what’s the price tag on these efforts?

Here’s the formula:

 

(Total sales + Marketing expenses) ÷ Number of new customers = Customer acquisition cost

 

It’s important to know what you’re spending per customer so that you can manage your budget and track the effectiveness of your initiatives. As your business grows and your customer base expands, you can hopefully benefit from more organic growth and decrease these numbers.

Customer Retention Rate

Bringing customers into the fold is only worthwhile if you have the ability to keep them there. For this reason, your retention rate needs to be watched like a hawk. 

Here’s the formula:

 

(Total customers at end of period New customers during period) ÷ Customers at start of period x 100 = Customer retention rate

 

As you monitor this metric, you can see which of your efforts have the most impact on keeping your customers happy and loyal.

Lifetime Value of Customer

With all the work you’re putting into getting and keeping new customers, it’s illuminating to know how much those precious customers are worth for your business. For example, you’ll want to ensure that this KPI is lower than your customer acquisition cost. Otherwise, you’re losing money in the long run.

Revenue Growth Rate

Every business on earth wants to grow its revenue—but a surprising amount of small businesses don’t know the rate at which that’s actually happening. Don’t let yourself be counted among these uninformed entrepreneurs.

Here’s the formula:

 

Total revenue for current year ÷ Total revenue from prior year = Revenue growth rate

 

Understanding the evolution of your revenue can help you to create more accurate budgets, measure the effectiveness of your initiatives, and forecast the future.

Inventory Turnover Ratio

This important metric helps you to understand how smoothly you’re managing your inventory. More specifically, it tells you how quickly you’re replacing inventory for a set period.

Here’s the formula:

 

Total cost of goods sold + (Beginning and ending inventory balances ÷ 2) = Inventory turnover ratio

 

“The inventory turnover ratio is an important financial ratio for many companies,” says The Balance Small Business. “Of all the asset-management ratios, it gives the business owner some of the most important financial information by showing how many times the company turns its inventory over within the given period. The inventory turnover ratio measures the efficiency of the business in managing and selling its inventory in a timely manner.”

If you sell something shelf-stable, like soccer shoes, your inventory turnover ratio will be quite relevant—and if you sell something perishable, like artichoke hearts, this metric will be critical. 

Accounts Payable Turnover Rate

This KPI helps you to track your effectiveness when it comes to paying suppliers for goods or services. Keeping your finances updated in this regard is essential for the health of your business.

Here’s the formula:

 

Cost of total supplier purchases ÷ Average accounts payable = Accounts payable turnover rate

 

Your accounts payable turnover rate allows you to see clearly how much money you’re doling out to suppliers. When spending reductions are necessary (and they’re always preferable), this KPI can show you where efficiencies are most likely to be attained.

Net Profit

This metric should be considered essential for most small businesses. Keep in mind that your profitability will rarely be static, and you shouldn’t plan on it always increasing. Instead, your business will likely experience ebbs and flows in customer activity, as well as times when major business expenditures are temporarily reflected in a lower rate.

Here’s the formula:

 

Revenue – Expenses = Net profit

 

Tracking this metric empowers you to measure profitability and make the kinds of improvements that yield big results on your bottom line.

Quick Ratio

Want a rapid snapshot of your cash flow? By calculating your quick ratio, you can ensure that you have enough resources on hand to meet current demands. 

Here’s the formula:

 

(Cash + Accounts receivable + Marketable securities) ÷ Current liabilities = Quick ratio

 

Anytime your quick ratio is at or above 1, you should be in good shape. Problems arise when your ratio is less than that, as you could struggle to meet your obligations even if you were to sell your liquid assets.

Monthly Recurring Revenue

This KPI is only relevant for businesses that have a set amount of revenue coming in from consistent sources. For example, some clients might keep a business on retainer, paying it a recurring amount each month.

Here’s the super-simple formula:

 

Add up all recurring contracts = Monthly recurring revenue

 

If your business is on retainer with clients and earning recurring revenue, it’s essential that you know the total amount. Understanding this metric allows you to strategize and forecast more accurately, as you’ll know the guaranteed amount of money you’ll bring in for any given month.

Employee Retention Rate

Just as you want to hold onto your customers as long as possible, you should make efforts to keep your in-house talent. As every small business owner knows, it’s expensive to recruit, hire, and train new employees. Each time a quality employee walks out the door, you’re losing all the equity that you’ve built up with them.

Here’s the formula:

 

Number of employees retained at year’s end ÷ Number of employees at beginning of year x 100 = Employee retention rate

 

If your employee retention rate slides once in a while, it could easily be the result of an anomaly. But if you identify a downward trend, it’s time to assess your business and find out where improvements can be made.

Debt Ratio

There’s nothing wrong with having business debt—but you’ll want to keep an eye on your debt usage to ensure that it remains manageable. A debt ratio KPI helps you to do this.

Here’s one possible formula:

 

Total debt ÷ Total assets = Debt ratio

 

The lower your debt ratio, the lower your risk of being unable to meet your obligations. By analyzing your debt ratio, you can confidently use debt financing to take advantage of new opportunities and expand your business.

One other reason that debt ratios matter: lenders often use them to help determine your credit-worthiness. Keeping your ratio low will enable you to connect with more financing and help to increase the odds that your financing options will include more favorable rates and terms.

Review and Choose the Best KPIs for Your Business

Carpenter smiles while reviewing work

Dedicate some time this week to reviewing the KPIs your small business is already using. Which metrics are most beneficial? Which metrics need to be reevaluated? And what new metrics can you add to your tracking in order to help your business progress more directly towards its goals?

There are no silver bullets in the world of business KPIs, so plan on a constantly evolving process of identifying new ways to get better. By taking this flexible approach to progress, you’re bound to enjoy a smoother path to your next great business accomplishment.

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Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.