Creating a business plan? You need to include key metrics to measure success. These numbers help track your company’s progress and show potential investors how well you’re doing.
Understanding Key Performance Indicators
Key Performance Indicators (KPIs) help businesses track progress and measure success. They provide valuable insights into company performance and guide decision-making.
Defining Key Performance Indicators (KPI)
KPIs are measurable values that show how well a company is achieving its main goals. They help you focus on what matters most for your business success.
You might use KPIs to track:
- Sales growth
- Customer satisfaction
- Employee productivity
- Website traffic
KPIs should be specific, measurable, and tied to your business objectives. For example, if you run an online store, a relevant KPI could be “monthly conversion rate.”
Good KPIs are:
- Easy to understand
- Clearly defined
- Actionable
Differentiating Between KPIs and Metrics
While KPIs and metrics are related, they serve different purposes. KPIs are the most important measures for your business goals. Metrics, on the other hand, are broader and can include any data you track.
You can think of KPIs as a subset of metrics. All KPIs are metrics, but not all metrics are KPIs.
For instance, “total website visitors” is a metric. But “percentage of visitors who make a purchase” could be a KPI if it aligns with your main business goal.
KPIs focus on critical areas that impact your business the most. They help you make strategic decisions and improve performance where it counts.
Revenue-Based Metrics
Revenue-based metrics help businesses track their financial performance and growth. These numbers give you insights into your company’s money-making ability and profit potential.
Sales Revenue
Sales revenue shows how much money your business brings in from selling products or services. This metric is a key indicator of your company’s size and market presence.
You can calculate sales revenue by multiplying the number of units sold by the price per unit. For example:
A coffee shop sells 1,000 cups of coffee at $3 each. Sales Revenue = 1,000 x $3 = $3,000
An online store sells 500 t-shirts at $20 each. Sales Revenue = 500 x $20 = $10,000
A consulting firm charges $150 per hour and works 100 hours. Sales Revenue = 100 x $150 = $15,000
You might want to track this metric monthly, quarterly, or yearly to spot trends in your business growth.
Net Profit Margin
Net profit margin measures how much profit your company keeps from its total revenue. This metric shows your business’s ability to control costs and price products effectively.
You can find your net profit margin by dividing net profit by total revenue and multiplying by 100. For instance:
A bakery has $50,000 in revenue and $10,000 in net profit. Net Profit Margin = ($10,000 / $50,000) x 100 = 20%
A software company earns $1 million in revenue with $200,000 net profit. Net Profit Margin = ($200,000 / $1,000,000) x 100 = 20%
A hair salon makes $80,000 in revenue and $16,000 in net profit. Net Profit Margin = ($16,000 / $80,000) x 100 = 20%
You could use this metric to compare your business to others in your industry or to track improvements over time.
Gross Profit Margin
Gross profit margin shows the percentage of revenue left after subtracting the cost of goods sold. This metric helps you understand how efficiently you produce or buy your products.
To calculate gross profit margin, divide gross profit by total revenue and multiply by 100. Examples include:
A bookstore has $100,000 in revenue and $60,000 in cost of goods sold. Gross Profit Margin = (($100,000 – $60,000) / $100,000) x 100 = 40%
A car dealer sells $500,000 worth of cars with $400,000 in costs. Gross Profit Margin = (($500,000 – $400,000) / $500,000) x 100 = 20%
A restaurant earns $200,000 with $120,000 in food and labor costs. Gross Profit Margin = (($200,000 – $120,000) / $200,000) x 100 = 40%
You can use this metric to spot pricing issues or rising costs in your business.
Customer-Focused Metrics
Customer-focused metrics help you track and improve your relationships with customers. These metrics give you insights into how well you’re attracting, keeping, and satisfying your customers.
Customer Acquisition Cost (CAC)
CAC measures how much money you spend to get a new customer. This metric helps you figure out if your marketing and sales efforts are cost-effective.
To calculate CAC, divide your total marketing and sales costs by the number of new customers gained in a specific time period.
You could track CAC for:
- Social media advertising
Cost: $5,000
New customers: 100
CAC = $50 per customer - Email marketing campaign
Cost: $2,000
New customers: 80
CAC = $25 per customer - Trade show participation
Cost: $10,000
New customers: 50
CAC = $200 per customer
Customer Retention Rate
This metric shows the percentage of customers who stay with your business over time. A high retention rate means your customers are happy and loyal.
To calculate retention rate, subtract the number of new customers from the total customers at the end of a period. Divide this by the number of customers at the start of the period, then multiply by 100.
You might want to measure retention rate for:
- Monthly subscription service
Start: 1000 customers
End: 980 customers (50 new)
Retention rate = 93% - Yearly software license
Start: 500 customers
End: 475 customers (25 new)
Retention rate = 90% - Quarterly gym membership
Start: 200 members
End: 190 members (10 new)
Retention rate = 90%
Customer Lifetime Value (CLV)
CLV predicts how much money a customer will spend with your business over their entire relationship. This helps you decide how much to invest in keeping customers.
To calculate CLV, multiply the average purchase value by the number of purchases per year. Then multiply this by the average customer lifespan in years.
You can track CLV for different customer types:
- Online retail shopper
Average purchase: $50
Purchases per year: 4
Average lifespan: 3 years
CLV = $600 - Software as a Service (SaaS) user
Monthly fee: $100
Average lifespan: 2 years
CLV = $2,400 - Luxury car buyer
Average purchase: $60,000
Purchases per lifetime: 3
CLV = $180,000
Net Promoter Score (NPS)
NPS measures how likely your customers are to recommend your business to others. It helps you gauge customer satisfaction and loyalty.
To calculate NPS, ask customers to rate their likelihood of recommending your business on a scale of 0-10. Subtract the percentage of detractors (0-6) from the percentage of promoters (9-10).
You could use NPS to evaluate:
- Customer support experience
Promoters: 60%
Detractors: 20%
NPS = 40 - Product satisfaction
Promoters: 45%
Detractors: 15%
NPS = 30 - Overall brand perception
Promoters: 70%
Detractors: 10%
NPS = 60
Efficiency and Growth Metrics
Efficiency and growth metrics help you track your company’s progress and spot areas for improvement. These numbers give you a clear picture of how well your business is doing and where it can get better.
Inventory Turnover
Inventory turnover shows how fast you sell and replace your stock. A high turnover rate means you’re selling products quickly and not tying up money in excess inventory.
You can calculate inventory turnover with this formula: “Cost of Goods Sold / Average Inventory Value”
You might want to track:
- “Days Sales of Inventory”: 365 / Inventory Turnover Ratio
- “Gross Margin Return on Investment”: Gross Profit / Average Inventory Value
- “Sell-Through Rate”: Units Sold / Units Received
Order Fulfillment
Order fulfillment metrics tell you how well you’re meeting customer demands. They help you find ways to speed up delivery and boost customer happiness.
You could measure:
- “On-Time Delivery Rate”: Orders Delivered On Time / Total Orders
- “Order Accuracy Rate”: Correct Orders / Total Orders
- “Average Processing Time”: Total Processing Time / Number of Orders
These numbers can show where your process might be slowing down or where mistakes happen most often. By watching these metrics, you can spot trends and make smart choices to grow your business.
Operational and Productivity Metrics
Tracking how well your business runs and how much work gets done is key for success. Let’s look at some ways to measure these areas.
Employee Productivity
You can use metrics to see how much your workers are getting done. This helps spot top performers and areas for improvement.
Sales per employee: Total sales / Number of employees
You might want to track this monthly to see trends.
Customer service tickets resolved per hour: Tickets resolved / Hours worked
This could show which team members are most efficient.
Units produced per shift: Total units / Number of shifts
You could use this in a factory to compare output across different times.
Operational Efficiency
These metrics show how smoothly your business runs. They can help you find ways to save time and money.
Inventory turnover: Cost of goods sold / Average inventory value
You can use this to see how quickly you’re selling your stock.
Order fulfillment time: Time from order placement to delivery
This could help you spot delays in your shipping process.
Equipment downtime: Hours equipment is not working / Total available hours
You might want to track this to plan maintenance and upgrades.
Financial Health Indicators
Good financial health is key for any business. These metrics help you keep tabs on your money and spot issues early.
Cash Flow
Cash flow shows how money moves in and out of your business. It’s a big deal for keeping things running smoothly.
You can track:
- Operating Cash Flow: (Net Income + Depreciation – Change in Working Capital)
- Free Cash Flow: (Operating Cash Flow – Capital Expenditures)
- Cash Flow Forecast: (Beginning Cash + Expected Inflows – Expected Outflows)
These numbers help you see if you have enough cash to pay bills and grow your business.
Accounts Receivable
Accounts receivable is money customers owe you. Keeping an eye on this helps make sure you get paid on time.
You might want to look at:
- Days Sales Outstanding: (Accounts Receivable / Total Credit Sales) x Number of Days
- Accounts Receivable Turnover: (Net Credit Sales / Average Accounts Receivable)
- Collection Effectiveness Index: (Beginning Receivables + Credit Sales – Ending Total Receivables) / (Beginning Receivables + Credit Sales – Ending Current Receivables) x 100
These metrics show how fast you collect money and if you need to change your credit policies.
Burn Rate
Burn rate tells you how fast your company spends money. It’s super important for startups and growing businesses.
You could track:
- Gross Burn Rate: (Total Operating Expenses / Number of Months)
- Net Burn Rate: (Cash Balance at Start of Period – Cash Balance at End of Period) / Number of Months
- Runway: (Cash Balance / Net Burn Rate)
Knowing your burn rate helps you plan ahead and make smart choices about spending and fundraising.
Marketing and Sales Performance Metrics
Tracking key metrics helps you measure and improve your marketing and sales efforts. These metrics give you insights into customer behavior, campaign success, and areas for growth.
Conversion Rate
Conversion rate shows how many visitors take a desired action on your website or landing page. You can track different types of conversions:
Email signups: (Number of signups / Total visitors) x 100
Example: 50 signups / 1000 visitors = 5% conversion rate
Product purchases: (Number of purchases / Total visitors) x 100
Example: 30 purchases / 1000 visitors = 3% conversion rate
Free trial activations: (Number of trial activations / Total visitors) x 100
Example: 80 trial activations / 1000 visitors = 8% conversion rate
Leads Per Month
Leads per month measures how many potential customers you attract. You can track leads from different sources:
Website form submissions: Count the number of contact form fills
Example: 150 form submissions in January
Phone call inquiries: Tally inbound sales calls received
Example: 75 phone inquiries in February
Event signups: Track registrations for webinars or workshops
Example: 200 webinar signups in March
Marketing Strategies
Marketing strategies help you reach and engage your target audience. You could measure the success of various approaches:
Social media engagement: (Likes + Comments + Shares) / Total followers
Example: (500 + 200 + 100) / 10,000 followers = 8% engagement rate
Email open rate: (Number of opens / Number of emails sent) x 100
Example: 2,000 opens / 10,000 emails sent = 20% open rate
Pay-per-click ads: (Number of clicks / Number of impressions) x 100
Example: 500 clicks / 50,000 impressions = 1% click-through rate
Strategic Progress Metrics
Strategic progress metrics help track your company’s growth and success over time. They give you insights into how well you’re meeting goals and where you might need to adjust your strategy.
Milestones
Milestones are key achievements that mark important steps in your business journey. You can use them to measure progress and motivate your team.
You might want to track:
Product launches: “Released version 2.0 of our app”
Number of units sold: “Sold 10,000 units in Q3”
Revenue targets: “Reached $1 million in annual recurring revenue”
To monitor milestones, you could create a timeline with specific dates and goals. This helps you stay on track and celebrate wins along the way.
Market Share
Market share shows how much of the total market your business controls. It’s a good way to see how you stack up against competitors.
You can measure market share by:
Sales volume: (Your sales / Total market sales) x 100
Revenue: (Your revenue / Total market revenue) x 100
Customer base: (Your customers / Total market customers) x 100
For example, if you sell 1,000 units out of 10,000 total units in your market, your market share would be 10%.
Innovation Metrics
Innovation metrics help you see how well your company is creating new ideas and turning them into successful products or services.
Some metrics you could track are:
New product revenue: (Revenue from new products / Total revenue) x 100
R&D spending: (R&D expenses / Total revenue) x 100
Patent applications: Number of patents filed per year
For instance, if 30% of your revenue comes from products launched in the last three years, that’s a sign of strong innovation.
Engagement and Satisfaction Indicators
Employee Satisfaction
Employee satisfaction tells you how content your workers are. You can track this in a few ways:
eNPS (Employee Net Promoter Score):
Ask “How likely are you to recommend our company as a place to work?”
Rate answers from 0-10.
eNPS = % Promoters (9-10) – % Detractors (0-6)
Job Satisfaction Index: Use a survey with questions like “I enjoy my work” rated 1-5.
Calculate the average score across all questions.
Turnover Rate: Count how many employees leave in a year.
Turnover Rate = (Number of Separations / Average Number of Employees) x 100
Employee Engagement
Employee engagement shows how committed and passionate your workers are. Try these metrics:
Absenteeism Rate: Track unplanned absences.
Absenteeism Rate = (Number of Unplanned Absence Days / Total Workdays) x 100
Productivity Rate: Measure output per employee.
Productivity Rate = Total Output / Number of Employees
Participation in Company Events: Count how many join optional activities.
Participation Rate = (Number of Participants / Total Employees) x 100
Social Media Engagement Metrics
Social media engagement shows how well your online content connects with followers. You can measure it like this:
Engagement Rate: Look at likes, comments, and shares.
Engagement Rate = (Total Engagements / Number of Followers) x 100
Click-Through Rate (CTR): See how often people click your links.
CTR = (Number of Clicks / Number of Impressions) x 100
Audience Growth Rate: Track new followers over time.
Growth Rate = (New Followers / Total Followers at Start of Period) x 100
Return on Investment Metrics
Return on investment metrics help you gauge the profitability and efficiency of your business investments. These metrics show how well your money is working for you and can guide future decisions.
Return on Investment (ROI)
ROI measures the profit or loss from an investment relative to its cost. You can calculate it by dividing the net profit by the total investment cost and multiplying by 100.
You might want to track ROI for:
Marketing campaigns: ROI = (Revenue from campaign – Cost of campaign) / Cost of campaign x 100
New equipment purchases: ROI = (Net profit from equipment – Cost of equipment) / Cost of equipment x 100
Product development: ROI = (Revenue from new product – Cost to develop) / Cost to develop x 100
A positive ROI means your investment is profitable, while a negative ROI suggests you’re losing money.
You could use ROI to compare different investments and choose the most profitable options for your business. Higher ROI percentages indicate better returns on your money.