How to measure KPI in small business
As a solo entrepreneur, you pour your heart and soul into your business. You have the creativity, the passion, and the drive to succeed. But amidst all the hustle, it's easy to overlook one crucial element that can make or break your journey: knowing your numbers.
I know, I know, a roll of your eyes and a yawn and a “where do I start?”. Or maybe even you think you know what you want to earn and have a rough idea of what you spend for your business each month. But, that’s not enough.
I’m not talking about accounting here or “having an accountant.” This isn’t about having that side under control - totally different. (although a good accountant might help with some of this too).
It's about having the management information you need to make informed decisions, drive growth, and achieve financial and lifestyle freedom. Knowing your numbers can be the answer to overcoming overwhelm in business and finding clarity.
So, what are the top KPIs every small business should track?
Why Knowing Your Numbers Matters
Financial Clarity: Knowing your numbers provides a clear picture of your financial health. It helps you understand where your money is coming from and where it's going, enabling you to make strategic decisions and prioritize business ideas effectively.
Profitability Analysis: By analyzing the profitability of each service or product, you can identify which areas of your business are thriving and which ones need attention. This insight allows you to focus on high-margin offerings and eliminate or improve low-margin ones. This is where a business strategy consultant can provide invaluable advice.
Informed Decision-Making: With accurate data easily accessible, you can make better decisions about pricing, marketing, and investment. You can also identify trends and anticipate future needs, keeping your business agile and responsive. These are essential productivity hacks for small business owners.
Goal Setting and Tracking: Knowing your numbers helps you set realistic goals and track your progress. It provides a benchmark for measuring success and adjusting your strategies as needed. This is a crucial aspect of strategic planning for small business growth.
Key Metrics Every Business Owner Should Track
Revenue: This is the total amount of money your business brings in from sales. Tracking your revenue helps you understand your business's earning power and growth trajectory.
Expenses: These include all the costs incurred in running your business, such as rent, utilities, salaries, and marketing. Knowing your expenses helps you manage your cash flow and identify areas where you can cut costs.
Profit Margins: This is the difference between your revenue and expenses, expressed as a percentage. It indicates how much profit you're making on each dollar of sales. For service-based businesses, consider the time spent on each service and the costs associated with delivering it. For product-based businesses, include the cost of goods sold.
Break-Even Point: This is the point at which your total revenue equals your total expenses. Knowing your break-even point helps you set sales targets and pricing strategies.
Cash Flow: This metric tracks the movement of money in and out of your business. Positive cash flow means you have more money coming in than going out, while negative cash flow indicates the opposite. Monitoring cash flow helps you ensure you have enough liquidity to cover your expenses and invest in growth.
Sales Conversion Rate: This is the percentage of leads that turn into paying customers - whether that’s on your website as an ecommerce business or leads in a service business, the principle is the same. Improving your conversion rate can have a substantial impact on your revenue without increasing your marketing spend.
Profit vs. Salary: Understanding the difference between your business's profit and the salary you take is crucial. Profit is the amount left after all expenses are paid, which can be reinvested into the business or taken as owner's equity. Your salary is the regular payment you take from the business to “pay yourself”. Separating these helps ensure you don't overdraw from the business funds, maintaining a healthy cash flow.
Examples of How to Apply This Knowledge
Service-Based Business: Suppose you offer coaching services. Calculate the cost of delivering a one-hour session, including your time, marketing expenses, and any tools or software you use. Compare this to the price you charge to determine your profit margin. If your margins are thin, consider increasing your prices, finding ways to deliver the service more efficiently, or focusing on higher-value offerings.
Product-Based Business: If you sell handmade jewelry, track the cost of materials, labor, and shipping for each piece. Analyze your sales data to identify your best-selling items and focus your marketing efforts on promoting them. If some products are not selling well, consider discontinuing them or finding ways to improve their appeal.
Managing Profit and Salary
Understanding the distinction between profit and salary is vital for maintaining both personal and business financial health:
Profit: This is the net income your business earns after all expenses have been deducted from total revenue. Profits can be reinvested into the business to fund growth, pay down debt, or saved for future needs.
Salary: This is the regular income you draw from your business for your personal use. Setting a fixed salary helps maintain consistent personal finances and avoids the risk of draining your business accounts.
To manage both effectively:
Set a reasonable salary based on your business's financial health.
Keep personal and business finances separate.
Reinvest a portion of your profits back into the business.
Regularly review your financial statements to ensure you're maintaining a balance.
Final Thoughts
Knowing your numbers is a powerful way to take control of your business and drive it towards success. By understanding and regularly reviewing your key metrics, you can make informed decisions, optimize your operations, and achieve your goals with confidence.
Whether you're feeling overwhelmed, struggling with productivity, or lacking clarity, focusing on your numbers can provide the insight and direction you need. Consider finding a business coach to help focus on these areas and provide accountability.
Start today by setting up a simple system to track your key metrics. Knowing your numbers is not just a one-time task—make it a regular part of your business routine to stay on top of your game and achieve the lifestyle and financial freedom you deserve.
And if you can’t find the time - download my free guide to finding 4 hours in your week especially for business owners.
Remember, sustainable productivity habits and strategic clarity can lead to exponential business growth. Invest in a business strategy consultant if needed, and join accountability groups for entrepreneurs to stay motivated. Balancing work and personal life is also crucial, so explore work-life balance tips for entrepreneurs to maintain a healthy and productive lifestyle.
