There are three simple Key Performance Indicators you can track that will readily provide you information you need about your company’s performance, profitability and liquidity.
Measure these three KPIs at the same time at least once per week – over time they will help you spot trends. You want to see if your business is continuously improving and also detect patterns that will alert you to any pivots you need to make.
Gross Sales–Sales Discounts–Returns–Refunds=Net Sales
Net Sales is a performance metric – an indication of how well your business is doing. It’s simply gross sales less any discounts, returns or refunds. Measure the % difference between gross and net sales. Each operator in this formula tells you something important about your business. For example, if discounts are trending upwards, are you training your customers to wait for sales?
Gross Profit Margin
Net Sales – Cost of Sales = Gross Profit Margin
This is simply your Net Sales less Cost of Sales and provides valuable information on your company’s profitability. Cost of Sales are the direct costs of selling your product or service – they are incurred every time you sell a product. This metric tells you how much margin remains to cover operating expenses and profit. Make sure you are properly measuring your Cost of Sales. We come across many companies who are not properly accounting for it and have an inaccurate view of their true margins. If in doubt, ask an accountant to review.
Virtually every business owner tracks cash regularly. It’s a simple as looking at your online bank balance. We want to dig a little deeper and understand a couple things:
- Is the bank balance changing due to ongoing operations or one-time items?
- How much did the bank balance change since the last time you looked at it?
Review the transactions coming through your accounts to see where the cash is coming and going. You are trying to determine what your cash needs are for the next four to eight weeks and if you have enough adequate cash flow.
How to Measure
Metrics should be measured for the current month and year to date. Ideally, you are comparing performance against your annual plan. If you don’t have a plan in place, compare against the prior period and year ago period. Prepare and review at least once per week. It should take you no longer than 15-30 minutes.
Dig Deeper From Time to Time
Over time, you’ll see patterns emerge from your data. If you need to investigate further, do a simple analysis. For example, if you see a spike in returns, is it due to higher demand or is there a quality problem with your products? These quick analyses can provide valuable insight into potential problems before they arise.
Grow Into More Sophisticated Reporting
As you track these simple KPIs you’ll likely want to learn more about how your business operates and get others on your team to become more data driven. There are many KPIs out there, two of the more popular are Cost to Acquire a Customer and Lifetime Value of a Customer. Effective KPI systems grow out of a financial planning process and are enabled by management dashboards.