When a small business begins to grow, it becomes necessary for stakeholders to agree on quantifying its success. When a company takes off, it becomes essential to use specific indicators to take charge of its growth trajectory.
Key Performance Indicators (KPIs) are the metrics on which you can quantify a business's achievements. They are outcome-based, quantifiable elements that you can use to determine whether your business is on track to meet its goals. A good business growth plan should use between five and seven KPIs to track and manage a business's progress.
The anatomy of a KPI metric is made up of:
Now that you know how a KPI is structured, here are six of the most important KPIs that a small business or enterprise with a field workforce should track and manage.
You can quickly tell whether your business is on its course to meeting its goals based on whether it makes a profit or a loss. The monthly profit or loss is calculated by subtracting business expenses from revenue.
Business expenses typically include fixed costs paid every month and operations costs that may vary. Fixed costs include rent, salaries, utilities, and costs of advertising. Variable costs are unexpected and may often fluctuate from month to month. Examples include fuel, costs of equipment repair, and commissions.
The profit or loss KPI is a crucial tool used to determine what's using up the business' financial resources. You can then compile profit and loss reports every month to analyze its performance for that month. Based on these reports, you can make critical business decisions such as:
Expenses should not use up a significant portion of the business profits. Your business will reach its objectives sooner if more profit is reinvested into the business. As a rule of thumb, keep the total monthly operations costs, including fixed and variable expenses, at less than 30% of the revenue.
It is vital for businesses offering professional services to identify and keep track of the right service metrics. The customer service KPI may as well represent the overall trajectory of the company.
For example, a plumbing business may need to document the response times and how many workers it takes to complete a service ticket vis-à-vis its revenue. In this case, the KPI measures the team's promptness and helps you determine whether the business is running efficiently.
Professional services businesses can benchmark service trends and compare them with revenue trends to analyze the business trajectory. When done right, Service Metrics KPIs can help a company develop an effective strategy to meet measurable goals such as 'making $1M in revenue in a year.'
Sales revenue is the amount of money the business received for the services it offered. This is one of the most fundamental metrics used to determine the success of a business. Many small business owners use this metric early in the company to decide whether to scale their field workforce, expand service areas, or invest in better tools and equipment.
However, unlike profit margins, sales revenue KPI does not tell much about its overall health. Therefore, the sales revenue KPI should not be used as the sole basis of making critical long-term decisions of the business.
The good thing about sales revenue KPI is that the data is easy to analyze - even outside the business' financial period. A sales manager or team can determine whether the company is doing better or worse with a quick analysis.
The sales revenue KPI would be most useful to sales teams, helping them gauge their marketing or sales tactics' effectiveness. By collecting sales data and analyzing revenues, they can predict sales trends for regions they target, times of sale, or seasons.
According to a Harvard Business Review study, a business can analyze sales revenue information and use the report to forecast future opportunities and chart a growth path that best compliments its overall goals.
The gross profit margin is a financial KPI calculated as a percentage value of the business revenue. You can calculate it by subtracting the cost of providing a service from the sales revenue then dividing the result by the sales revenue.
Here is an example of gross profit margin calculation for a roofing company that earns $800,000 but spends $500,000 in direct service costs:
A healthy services business should have a large enough profit margin to cover fixed and recurring expenses and still leave a profit at the end of the period.
The gross profit margin is one of the most critical KPIs for professional service contractors as it more accurately reflects the health of the business than revenue. An excellent gross profit margin for companies in the professional services field is 20% or higher.
A 'healthy' gross profit margin varies between business models, industries, and business sizes. To provide perspective, a healthy gross profit margin for a construction firm would be 10%, while a banking institution needs a 90% gross profit margin.
The ability to retain customers is one of the most useful metrics for professional service businesses. This KPI is vital for three reasons:
The value of customer retention for small businesses and enterprises cannot be overstated. A study by The Economics of E-Loyalty found that a mere 5% increase in a business' customer retention rate can increase profit by as much as 95%.
There are easy ways a professional service business can determine its customer retention rates. The most popular is using simple surveys to determine whether a customer intends to return after getting service from the company.
There are also robust new tools such as the Net Promoter Score that a business can use to measure customer loyalty. This KPI can be a powerful metric to check the business' customer service practices or fine-tune customer satisfaction campaigns.
Advertising isn't cheap. With so many advertising options available to businesses, it can be tricky to find the right platform with the highest returns on investment(ROI). ROI is a must-use performance indicator for any business that pays for any form of advertising.
Many factors determine the return on investment of an advertising campaign. The obvious ones are the advertising platform and media, advertising strategy, budget, and target customers.
A good advertising ROI for a professional service business is between 25% and 50%. The value of return on investment is essentially the percentage of sales or revenue received by the business directly from an advertising campaign over the advertising's total cost within a period.
A modern professional services business must use sophisticated methods to determine its growth trajectory. Considering the complexity of the KPI metrics calculations, the range of the raw data, and the sophistication of analysis tools, charting and tracking KPIs can be challenging to any entrepreneur.
If you are not tracking these six performance metrics in your business, you may never accurately chart the way forward for its growth. The best course of action is to hire a cloud-based business optimization service such as Service Demand to do all the hard work for you. Contact Service Demand today to get personalized advice on the best KPIs for your business and how to use them to define its growth path.