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). However, the first part may be trickier than the second.
How do you even come up with the right KPIs to track?
Know that there are two groups of KPIs that every business should track, which are industry-specific KPIs and universal KPIs.
This article is about universal KPIs that are essential for every business.
The gross profit margin is one of the most critical KPIs. After all, the profit motive drives most businesses since if there's no profit, there's no business.
But 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 troubles in the long run.
That's why it's important to keep an eye on your gross profit margin. Here's 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's great! But if it's lower compared to the same quarter of last year, maybe it's 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 goods sold (COGS). So you can either decrease COGS or increase sales (at constant or a smaller increase in COGS).
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.
How can you tell if your business is going in the right direction?
Your revenue ratio is a good 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.
The Internet has enabled business owners to track conversion rates more precisely than ever. If you're spending money on ads, for example, it's essential to find out which ads work and which ones do not.
It's 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.
The most critical KPIs may depend on your business. Among others, you might want to track your profit margin and revenue ratio.
In the digital world of today, it may also interest you to monitor specific conversion rates.
Tracking these KPIs will let you know the state of your business so you can come up with ways to make it even more profitable.