I get it...it's great to have all those numbers to prove we're doing something. But there's a sneaky little problem that most small business owners share. The numbers mean nothing in the overall strategy of building or realigning our business. And why? Because we don't make the numbers work for us.
Sure, maybe you know how many people are on your email list. But if you don't understand the metrics, the people on the list aren't helping you build awareness of your mission or cause.
And you may have tracked your total Social Media reach on a spreadsheet, and update it monthly, but do you know WHO you're reaching and WHY they follow you?
Yes, you know profits are up (or... gulp... down) from last year, but do you understand WHY (other than COVID)?
These numbers help you develop an understanding of your ROI and KPI - that is - Return On Investment, and Key Performance Indicators. This article isn't a deep-dive into all the numbers, but we want to give you a handful of reasons they are important.
What's the Difference?
KPI numbers help you test results in the middle of a campaign, quarter, or event.
ROI numbers give you the data you need at the end of those events. Consider this metaphor: your business is a book. KPI reviews each chapter. ROI is the grand conclusion of the story.
The important thing about Key Performance Indicators and Return on Investment numbers is the information they provide.
First, the numbers are actionable.
Second, you can measure the numbers.
Next, they are timely.
Lastly, they affect the bottom line of your business.
They sound a little like standard goal setting rules, don't they?
Return on Investment (ROI)
Here's the question ROI asks, "Is my business profitable?". The resulting numbers give you the answer. And here's the simple calculation: divide net profit by total assets.
But that's not all. ROI can also help you answer the question of long-term viability. One year with a negative ROI might simply mean you made some investments in your business that is going to result in a higher ROI in years to come. It's important to not look at your ROI in silos but rather considering the bigger picture to include impact. I highly recommend the book called "Nonprofit Sustainability: Making Strategic Decisions for Financial Viability". I met the authors of this book several years ago when the book was just coming out and the concepts in this book really resonated with me as another tool when considering a program, service, or goods' ROI.
Key Performance Indicators (KPI)
Each business determines the KPIs it tracks, but according to a Quickbooks article, here are some numbers to consider, and why they are important. We've taken the meat of this article and summarized, but if you want the entire concept and details, please refer to the original Quickbooks article.
CASH FLOW FORECAST: Because this number helps your business assess whether your sales and margins are appropriate, it is one of the most critical KPIs to track.
How: Add the total cash your business has in savings to the projected cash value for the next four weeks, then subtract the projected cash out for the next four weeks.
Why: Regular cash flow forecasts help identify problems in the early stages so you can make necessary adjustments. Cash flow forecasts help you forecast future surpluses or shortages, and help with tax planning and loan applications.
GROSS PROFIT MARGIN AS A PERCENTAGE OF SALES: Are you paying more to your suppliers than you're netting in sales? You can't achieve success if you are. This helps you know your total profits, rather than revenue.
How: 1) Divide your gross profit amount by your sales. 2) Divide that value by your sales amount to find out how much of your GPM makes up your overall sales. 3) Multiply that by 100 to express your gross profit margin as a percentage of sales.
Why: Understanding Gross Profit Margin as a Percentage of Sales, helps you know much money you’re keeping against the amount paid out to suppliers. As you keep more money, your gross profit margin increases. However, a decrease could signal your company is overspending on supplies. To compensate, you can reduce either overhead costs or increase prices on goods and services.
FUNNEL DROP-OFF RATE: The number of visitors who abandon a conversion process — or sales funnel — before completion.
How: 1) Find the number of visits for a particular conversion step in the funnel. 2) Subtract the number of visits that occurred during the first step. 3) Divide the value from the specific conversion step by the visits that took place during the first step to find the number of customers you lost along the way.
Why: When you identify the drop-off point, you can implement processes to correct the problem. If you rely on the internet as a primary sales tool, funnel drop-off rate is one of the most crucial performance indicators to track.
REVENUE GROWTH RATE: The rate at which a company’s income, or sales growth, is increasing.
How: Begin with your business’s total revenue for the current year; divide current income by total revenue from the previous year to find the rate of growth.
Why: Calculating the revenue growth rate regularly helps you assess whether growth is increasing, decreasing, or plateauing, and by how much.
INVENTORY TURNOVER: The number of units sold or used in a given period. This number reveals your ability to move goods.
How: Add up the cost of sold inventory and divide that total by the value of the inventory remaining at year’s end.
Why: A high turnover rate is great, but not if it is done by slashing prices significantly.
ACCOUNTS PAYABLE TURNOVER: The measure of the rate at which your business pays for goods and services in a given period.
How: Add up the cost of total supplier purchases and divide by average accounts payable.
Why: No business will keep its doors open for long if it doesn't pay its suppliers. This numbers helps you know if it is time to reduce spending.
RELATIVE MARKET SHARE: How much of a given market does your company control? Relative market share reveals how you are performing in relation to your competitors. A slight bump in profits means less if your company is falling behind its competitors.
How: 1) Learn the total sales revenue for your industry in your community. 2) Divide the total revenue into your revenue. For example: Total revenue in your town for your product/service is $300 million/yr. Your sales are $1.5 million. When you divide total revenue into your revenue, you end up with a relative market share of 5%.
Why: Once you understand your relative market share, you can make adjustments to your product and service offerings to improve long-term profitability for your business.
THE BOTTOM LINE
If it matters in the long run, the numbers need to be tracked and analyzed.
And though Waggoner Professional Services can't help you track everything, we can help you keep track of your finances, membership, and event results through our QuickBooks, Member Management, and Event/Training Management services. Learn more, then let's have a conversation about how we can help.