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Making a profit is about more than watching the bottom line. Key performance indicators (or KPIs) are key business metrics you should monitor to make sure your business and financial management are on track. KPIs help you measure whether you’re meeting your goals, whether you’re on target with your business strategy, offer insight into how best to grow the business. Read on to see the most important KPIs you should be tracking.
1. Profit margin
Profit margin is your profit expressed as a percent of costs. The higher your profit margin, the better your business is doing. To calculate it, divide your profits by your costs to come up with the percent profit margin.
2. Average ticket size
The average ticket size is the average bill or the average amount a customer spends in one visit. It helps you figure out if a promotion is working (did your average ticket size go up in the promotion period?), whether you’re profitable on any given day, and how your business stacks up against the competition. Be sure to look at this figure in Clover Insights. Not only will it calculate the average ticket size automatically, it lets you compare yours to other local businesses in your area or to similar businesses in different cities. One quick way to increase sales and revenue is to focus on increasing the average ticket size with a quick upsell at the end of a transaction.
3. Average transactions
Average transactions is a figure that reflects the average number of sales you have in a day. The number of transactions times the average ticket size will give you the daily revenue number. Why track them individually? Because if there aren’t that many customers in your store and the number of transactions are low, you’ll want to try to increase your transaction size to meet your revenue goal for the day.
4. Conversion rate
Conversion rate reflects how many prospects turn into actual customers. If, for example, you send out a coupon, you can measure how many customers convert into a sale by dividing the number of coupons used by the number of coupons sent out. This KPI is often easier to measure online or digitally. While not a common financial business metric, it’s extremely useful when estimating how many coupons you’d have to give out to get a specific amount in sales back. It can also help determine whether you’re spending too much or too little on a promotion.
5. Average customer value
The average customer value is a measure of how much a customer spends with you over time, which is extremely useful to know so you don’t overspend to get new customers. To calculate average customer value, add up how much a customer spent in a year (minus the costs to serve them) multiplied by the number of years they are likely to be a customer. Tools like Clover Insights help you calculate this quickly and easily. In addition to getting a sense of how much each customer is worth, this value helps you determine which customers are your big spenders. These are the people you want to entice back into the shop often.
6. Customer acquisition cost
Customer acquisition cost measures how much money it took to get a customer. If you spent $100 on a promotion and got only 5 customers, your customer acquisition cost was $20. When making marketing decisions it’s useful to look at both the cost per customer acquisition and the average customer value over time.
7. Spend rate
Spend rate is a measure of negative cash flow. In English, that means the amount you’re spending to stay in business. If you just opened, this metric tells you how fast you’re burning through your savings or business loan and is often called the burn rate. With this KPI you can project out how much time you have to start turning a profit. Once you are profitable, it’s still important to keep track of your spend rate—your average costs in a month—to make sure you are earning enough to stay in the black.
8. Revenue growth rate
This simple calculation indicates the rate that your sales are increasing. To determine your revenue growth rate, divide the total revenue for the current year by the total revenue from the previous year. Many small businesses have seasonal dips and peaks, so take that into consideration when you look at the numbers. It might make more sense to calculate it by a particular season to see if your sales grew this summer or this past holiday season.
Forecast is a projection of how much you think you’ll make given your recent sales activity and what you know about the future. Monitoring your forecast helps you make staffing, budgeting and inventory decisions. Accounting and business analytics tools, such as Clover Insights, can help you quickly look at your historical sales information, your current average daily revenue, and estimate how much you’ll make this month or this year.
How to Choose Which KPIs Are Important to You
Which key business metrics you choose to monitor will depend on your type of business, whether you’re a start-up or have been in business for a few years, your size and location, and your business goals. (Need help determining business goals and strategy? Check out our blogs Business goal setting to thrive and 13 Tactics for improving your small business based on specific business goals.) Your unique business situation will help you determine which KPIs are relevant to you. Brand-new businesses should probably focus on bringing in foot traffic and developing a list of prospective customers, so they might focus on visits to the store, clicks on a website, or people who sign up to get coupons. A more established business might be focusing on increasing the amount each customer spends per ticket or on driving return customers, so their KPI’s might include average ticket sale or percent of returning customers.
The key business metrics you follow should closely tie to the things that will make your business a success over time and should help you make actionable decisions. Whatever metrics you choose to measure, make sure everyone on your team understands the goal, how you’re going to measure it, and why it’s important.
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