In every onboarding call, I ask my clients what their KPIs are. Often, they respond with their revenue target.

This actually isn’t a KPI. Rather, it’s a top-line goal that should be supported by the right KPIs.

And on Twitter, this thread turned out to be much more active than expected.

So I decided to write this week about KPIs—what they are, why they’re important, and how to pick the right ones for your business.

And if you’re not sure what to start tracking on your own, I share 10 KPIs at the end of this post to get you started.

What Are KPIs and Why Do I Need Them?

Without KPIs, you’re left to guess how well the business is doing and where it’s headed over time. It’s not enough to rely on one-time feedback or gut feeling.

KPIs are the metrics that have the greatest impact on whether your SMB struggles or thrives. When used correctly, they allow you to double down on what’s working and deal with any emergent warning signs before they pose a serious threat to your business.

But they’re often poorly chosen or misused.

When this happens, teams are left with numbers that either no one understands or that offer little value.

The good news is that you can identify a strong KPI by the following.

1. Good KPIs don’t just tell you what happened, they explain why and allow you to make the necessary adjustments.

2. KPIs measure how effectively an individual or organization accomplishes a specific activity rather than the completion of a high-level goal. Instead, KPIs are attached to the specific actions that as a whole determine whether or not your goals will be met.

3. Each KPI should be derived from at least one of the business’s overall goals. If you can’t explain the relationship between each KPI and its corresponding goal in one sentence or less, find another one.

4. Improvement in each KPI should directly strengthen the bottom line.

5. The right KPIs for your business can be accurately monitored on a regular basis, such as daily, weekly, or monthly.

Choosing the Right KPIs for Your Business

The right KPIs for your SMB will vary based on your business model, industry, and the outcomes you want. So, the first step in selecting KPIs is to understand which metrics have the biggest impact on your overall goals and work backward. Your goals should be a healthy combination of growth, profitability, and quality.

To do this, start by asking the right questions. What data do you need in order to track those metrics appropriately? Do these metrics, when taken together, tell you everything you need to know about how efficiently you operate, how satisfied your customers are, how quickly the business is growing, etc.?

Too often, I see businesses skip this step and rely instead on whatever data are already available or easy to collect.

At best, this leads to countless hours wasted combing through rows of irrelevant information. At worst, the end result is a set of vanity metrics that don’t answer the key questions driving performance.

The next step is to list the unique pain points and strengths of your business. You’ll want to double down on your strengths while monitoring for early signs of trouble while you work to improve those pain points. This exercise will allow you to actually track root causes rather than loosely related phenomena.

What do I mean by this?

Let’s say I’m looking to grow Revenue by 10% this quarter.

It would be tempting to focus exclusively on lead generation and driving more traffic to my website.

While this sounds like a reasonable approach, it assumes that there are no points of weakness in my sales funnel and that every piece of content on my website is driving conversions. This is rarely the case.

A better approach is to list all of the factors contributing to revenue and rank them by impact. From there, it’s much easier to zero in on the activities that will help me reach my goal.

Next, involve your team. As your business grows, your employees will start to know much more than you do about certain areas of the business. Let them propose KPIs and make sure that your list makes sense across the board.

And once you’ve listed your KPIs, be sure to still focus on improving the business as a whole. Your KPIs should serve as an actionable guide, but inflating your metrics for the sake of it misses the point.

At the same time, tying individual KPIs to pay and bonuses should be treated carefully to avoid creating perverse incentives.

10 KPIs for Any SMB

If you’re not entirely sure what to track right out of the gate, here are 10 KPIs that can give you a more complete picture of your SMB’s financial health, operational efficiency, positioning, and customer satisfaction—regardless of your industry or business model.

1. Cash Flow

   Cash flow helps you quickly assess whether your sales and profit margins are both healthy and sustainable. More on that here.

2. Gross Profit Margin (GPM)

   Tracking this metric over time tells you how much money you’re keeping in the business after paying employees, suppliers, and creditors. If your gross profit is trending down, you may want to reduce your overhead, renegotiate with suppliers or raise prices.

   Here’s how to calculate it.

   GPM = (Revenue - Cost of Goods Sold (COGS)) / Revenue *100%

3. Drop-Off Rate

   The drop-off rate measures the number of prospects who abandon your sales funnel prior to conversion. Calculating the drop-off rate at each step of the conversion process allows you to make targeted adjustments to boost sales.

   Here’s how to calculate it.

   Drop-Off Rate = (# of Users who Completed the Last Step - # of Users who Completed the First Step) / # of Users who Completed the First Step *100%

4. Revenue Growth Rate (RGR)

   Tracking your RGR regularly will tell you whether and to what degree growth is increasing, decreasing, or starting to plateau.

   Here’s how to calculate it.

   RGR = (Revenue in Current Period - Revenue in Previous Period) / Revenue in Previous Period * 100%

5. Inventory Turnover

   Tracking inventory turnover tells you not only how much you’re selling in a given period, but it also provides insight into your business’s ability to move goods more generally and can help you make more informed purchasing, pricing, and marketing decisions.

   Slower than expected turnover, for instance, could indicate lagging sales or holding excess inventory.

   Here’s how to calculate it.

   Inventory Turnover = COGS in Period / Average Inventory in Period

6. Accounts Payable (A/P) Turnover

   A/P turnover measures how often you pay vendors in a given period. Tracking this metric also helps you identify where you might be able to cut spending as needed.

   Here’s how to calculate it.

   A/P Turnover = Supplier Purchases in Period / Average A/P in Period

7. Accounts Receivable (A/R) Turnover

   A/R turnover tells you how efficiently the business collects revenue. A higher ratio indicates that you collect more quickly while a low ratio might prompt you to prioritize follow-up on unpaid balances.

   Here’s how to calculate it.

   A/R Turnover = Credit Sales in Period / Average A/R in Period

8. Relative Market Share

   Unlike the other KPIs on this list, relative market share is external and compares your performance to that of other businesses in the same space to better manage growth and view internal performance in context.

   Here’s how to calculate it.

   Relative Market Share = Your Market Share / Market Share of your Top Competitor

9. Repeat Purchase Ratio

   The repeat purchase ratio indicates the percentage of customers who made more than one purchase in a given time frame. A high repeat purchase ratio, where applicable, signals strong offerings and effective customer support.

   Here’s how to calculate it.

   Repeat Purchase Ratio = # of Repeat Purchasers in Period / Overall Customer Base in Period

10. Churn Rate

    Churn rates tell you how often customers choose to stop doing business with your company. Tracking this over time can help you stay ahead of client service and adjust your offerings to secure longer-term business.

    Collecting qualitative data on customer satisfaction via surveys can add context here while giving you more clues on what to tweak.

    Here’s how to calculate it.

    Churn Rate = (# of Lost Customers in Period / # of Customers at Start of Period) * 100%

Putting It All Together

Here are your top takeaways from this week’s post.

1. KPIs are not the same thing as your business’s top-line goals.

2. KPIs help you assess how well the business performs specific activities that contribute to it meeting its overall goals.

3. The best KPIs tell you why and how something happened, not just what.

4. Choosing the right KPIs for your business requires an understanding of the desired outcome and every factor contributing to it.

5. To get started, track your cash flow, gross profit margin, drop-off rate, revenue growth rate, inventory turnover, A/P turnover, A/R turnover, relative market share, repeat purchase ratio and churn rate.

Hungry for More?

1. Follow me on Twitter and LinkedIn for daily content to take your business to the next level.

2. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor