KPIs—key performance indicators—are metrics that display the health of your company and its progress toward its goals. There are dozens of KPIs businesses use, and each one has its own value based on what you want to measure or better understand about your business.
Keeping an eye on KPIs can help your company by allowing you to easily identify the times when your efforts paid off—and when they didn’t—giving you opportunities to evaluate your strategies. They also enable you to notice when performance is slipping and when you may need to update your past-successful practices to meet up with current consumer needs and demands.
So, what exactly are business KPIs and what KPIs should a business track? In this post, we’ll provide a primer to these all-important business performance metrics, from essential KPIs to monitor to ways KPIs can help your business qualify for financing.
KPI Basics
Before we delve into the specifics of KPIs, it’s important to understand why tracking them is not only useful, but in many ways crucial to the success of small businesses.
Benefits of KPIs
When you choose the right KPIs to track, it can offer many benefits for your company. The most useful KPIs:
- Provide clarity and focus to the businesses strategic plan by measuring progress on objectives.
- Create a way to communicate a shared understanding of success and progress.
- Provide triggers and alerts to help you identify when action is needed to step in and improve upon a declining KPI metric.
How are KPIs Measured?
There are two commonly used ways to measure performance: quantitatively and qualitatively.
Quantitative measurements are the most common KPI. These revolve around pure numbers: number of conversions, profit or loss margins, number of sales in a given period, numbers of new customers, growth over previous quarters, and so forth.
Quantitative KPIs are essential for financial management, and lenders will want to see that you thoroughly understand your company’s financial picture.
Qualitative measurements, while still represented by numbers, are based on subjective data. This can include customer satisfaction, brand perception, or employee engagement. NPSs (Net Promoter Scores) are a prime example of qualitative KPIs. This is where customers are asked to answer one single survey question: "On a scale of 0 to 10, how likely are you to recommend our company/product/service to a friend or colleague?" While the answer is a number, it is based on their subjective experience.
Qualitative KPIs are useful for creating marketing campaigns, company goals and objectives, and adjustments to business practices that can improve customer and employee perspectives.
Core KPIs for Small Businesses
If you are running a small business there are dozens of performance measures that you should be keeping track of to ensure that your business is running smoothly and efficiently, opportunities are not lost, and that both customers and employees are happy with your establishment. This is a lot to keep track of. But by focusing on the core types of KPIs to follow, you can simplify your performance tracking, and make sure you are not missing an important metric. Let’s take a look at examples of key performance indicators to consider for your business.
Financial KPIs
These KPIs are possibly the most important kind to follow and are a good place to start if you are new to performance tracking.
At the minimum, you’ll want to know your profit margins, net profits, and revenue or sales growth rate. These KPIs can provide a snapshot of your financial viability, are easy to understand, and simple to track. We’ll explore additional KPIs to utilize in conjunction with financing later.
Treasury management services can be a major asset in managing cash flow and liquidity and calculating your KPIs. They can improve your cash flow understanding, aiding your company in making smarter financial decisions. They can also simplify money collection and payments, improving key financial metrics.
Operational KPIs
Operational KPIs are used to evaluate the efficiency, effectiveness, and performance of different functions within an organization. These KPIs provide insights into the day-to-day operations and are instrumental in helping businesses track their progress, make data-driven decisions, and ensure that they are meeting their operational goals. Operational KPIs can vary widely depending on the nature of a business, where it is in its journey, and its stated objectives, but here are some common examples:
- Inventory turnover
- Order fulfillment rate
- Daily sales
- Labor productivity
- Customer service response times
Marketing and Customer KPIs
Because of their interconnected nature, we’ll lump these two final metrics together. As a business, it’s crucial to track and understand the success of your marketing campaigns in generating new leads or attracting new customers, as well as how effective your company is at retaining those customers and continuing to fulfill their needs. These can include your:
- Customer acquisition cost
- Customer lifetime value
- Return on marketing investment
- Conversion rate
Financing and KPIs
Many small businesses will require external financing—either at startup or doing periods of expansion—in order to develop or improve their operations. Financing allows a company to break down large, upfront costs into smaller, manageable payments, balancing the need for one time or occasional funding with cash flow regulation.
With small business financing, KPIs can have two important uses:
- KPIs can help your business calculate your need for financing and ability to repay debts and determine the best financing for your needs and financial outlooks.
- KPIs are also used by lenders and investors to determine your approval for financing or investment capital.
Key KPIs to be following that can help you prepare for and qualify for funding include:
- Burn Rate: How quickly your company is using up its available cash; helps you understand if your business is spending money faster than it's making it.
- Working Capital: Measures if you have enough available assets to meet short-term financial obligations.
- Cash Runway: How long your funds will last at your current burn rate.
- Weighted Average Cost of Capital (WACC): a complex calculation that illustrates the true cost of financing for debts by comparing interest rates to returns.
Additional KPIs lenders may look at are:
- Debt-Service Coverage Ratio: Determines a business’s ability to cover debt by comparing its debt obligations to operating income.
- Net Debt: Total debts (long- and short-term vs. total liquid assets).
- Loan-to-Value Ratio: Most often used with mortgages to calculate loan risk, compares the loan amount to the value of the property.
- Return on Equity: Net income divided by shareholders' equity. Common for equity financing.
How Banks Can Assist Small Businesses
Generating useful KPIs requires that businesses have lots of data on hand, from sales records to interest charges. Fortunately, financial institutions have many tools and services available that can easily and accurately provide these metrics and numbers for small businesses. At Moody Bank, these include:
Autobooks: Helps small businesses send invoices, track payment information, and receive payments. With income details gathered and organized in one system, Autobooks can simplify bookkeeping and financial management, helping businesses during account reconciliation and when tracking performance and creating financial statements, and Moody is one of the few regionally-owned and operated banks with Autobooks in Houston and South-Eastern Texas.
Merchant Services: Beyond increasing sales and efficiency, merchant services allow you to accurately track customer payments, compare monthly, quarterly, and yearly sales, and highlight areas of growth and contraction.
Other Modern Banking Services: From online management with detailed and exportable financial data for commercial savings and checking accounts to treasury management services like sweep/zero balance accounts and ACH payments for increased control of your cash flow, today’s banking services can assist your company in tracking key financial metrics.
Moody Bank, Your Small Business Partner
As a small business owner, you are responsible for a wide range of complex calculations to maximize your business’s resources. KPIs can help you make informed decisions that will benefit your business today, and for years to come.
At Moody Bank, our community-based experts will work one-on-one with our small business partners to help them find the right business bank accounts, services, and financing solutions based on their needs, goals, and financial picture. Whether you’re looking for flexible, local business loans in Texas or robust cash management solutions like Autobooks, reach out to our team in Houston, Galveston, Seabrook, Austin, Lake Jackson, or Friendswood today to learn more about what we can do for you.
For more financial tips for your small business, check out these recent posts: