I talk a lot on here about the importance of being data-driven. But I understand that few owners have the time, let alone interest, to crunch numbers for hours upon hours every week.

A far better approach is to select a few meaningful KPIs that guide your decision-making and support your broader objectives.

“Great, but where do I start?”

“How do I pick a ‘good’ KPI for my business?”

“Can you give me some ideas?”

These are questions I get all the time.

So this week, I’m sharing 6 KPIs that will transform your business—regardless of size or industry. My hope is that you’ll make this list your own over time, but these 6 are a wonderful place to start.

Without further ado, here they are:

1. Cash flow

2. Churn rate

3. Drop off rate

4. Inventory turnover

5. Gross profit margin

6. Revenue growth rate

Cash Flow

Simply put, this means tracking money flow in and out of your business in a given period. If your inflows exceed your outflows, then your net cash flow is positive, indicating that your liquid assets and ability to cover obligations are increasing.

Here’s how to calculate net cash flow.

Net Cash Flow (NCF) = Total Inflows - Total Outflows

While net cash flow seems simple, it’s important to remember that inflows don’t only result in making sales and outflows do not solely take the form of everyday expenses like rent and payroll.

Inflows can also come from interest, dividends, or licensing agreements to name a few. At the same time, selling products or services on credit rather than collecting cash immediately also affects a business’s inflows.

To better understand and manage cash flow, I recommend breaking this KPI into a few subtypes:

• Cash Flows from Operations, aka OCF: OCF tells you what’s coming in and going out that’s directly related to the making and selling of goods and day-to-day operations. OCF tells you whether or not the business is making enough to cover routine bills. The easiest way to calculate OCF is by subtracting operating expenses from the cash taken in from sales in the same period

• Cash Flows from Investing, aka CFI: CFI tells you the amount of cash collected or spent on investment-related activities for the period. Specifically, this includes the purchase or sale of hard assets, securities, or other businesses—just to name a few. Keep in mind that a negative CFI isn’t necessarily cause for concern. It could be the result of a significant amount of cash being invested back into growth, whether that be in the form of heavy R&D expenditures, acquisitions, or PP&E upgrades.

• Cash Flows from Financing, aka CFF: CFF tells you the amount of cash used to sustain and grow the company via capital. Not to be confused with CFI, CFF includes transactions around debt, equity, and paying (rather than receiving) dividends. The importance of this sub-KPI lies in its ability to give you valuable insight into the business’s capital structure.

Beyond tracking the sub-KPIs that I just listed, I also recommend paying special attention to your Free Cash Flow, or FCF to assess profitability.

Essentially, FCF tells you how much money you have left over after paying down debt, buying back equity, or paying dividends if applicable. In other words, this is the money you have left over once you’ve accounted for operating expenses and capital expenditures.

You may also track your Current Liability Coverage Ratio, which indicates the business’s ability to cover current liabilities with its OCF.

Churn Rate

Churn rate is the percentage of total customers lost in a given period.

Here’s how to calculate it.

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

Actively managing your churn rate serves quite a few purposes.

First, you can track it over time to better understand when and why more customers left. This information can help you tailor your offerings, plan for slower periods if seasonality is a factor, focus your marketing efforts, and guide pricing decisions. In addition, lowering churn will greatly reduce your customer acquisition costs.

Since every business is a bit different, here are some additional ways to think about churn.

First, you can calculate the churn rate in terms of the percentage of revenue churned rather than the number of customers lost. This adjustment allows you to consider concentration risk and customer quality as well.

Second, you might want to calculate a churn rate for your busy and slow periods, respectively. Doing so allows you to make more accurate year-over-year comparisons.

Finally, if your business is growing rapidly, accounting for customers gained in the same period as well as those you lost can give you a more accurate picture of the business.

Here’s how that changes the formula.

Adjusted Churn Rate = ((# of Customers Lost in Period / (# of Total Customers at the Start of Period + # of Total Customers at the End of Period) / 2)) * 100

Keep in mind that a typical churn rate will vary considerably across industries. For e-commerce businesses, churn can be as 70 percent. My advice to SMBs in this space is to focus on building customer relationships.

While Saas churn tends to be much lower (about 14%, per key.com), churn is one of the most important indicators of business viability due to the reliance on subscriptions. Building in as much stickiness as possible is one of your best routes to keeping customers.

Drop-off Rate

Drop-off rate is the percentage of customers who exit the sales funnel before moving onto the next step. A step could be filling out a form, booking an intro call, or making a payment—just to name a few.

Calculating the drop-off rate for each step of your selling process can give you a more complete picture of where and why you’re losing prospects.

Keep in mind that the drop-off rate is distinct from the exit rate. The exit rate refers to the percentage of customers who exit the sales funnel at a particular step in the process. The exit rate can also help you make targeted improvements to your customer experience, products, and more.

Here’s how to find your drop-off rate.

Drop-off Rate = ((Total # of Customers that Started the Process - Total # of Customers that Completed the Process) / Total # of Customers that Started the Process)) * 100

While drop-off rates vary a bit from business to business, looking at the standard conversion rates in your industry can give you a pretty good idea of where you stand. This is because drop-off and conversion rates are opposite one another.

Whether you have access to that information or not though, your best bet is always to calculate where you are today and focus on improving as much as you can.

Some of the best ways to reduce drop-off rates are to simplify your selling or checkout process, make onboarding as seamless as possible, provide top-notch customer support, and conduct A/B tests as you implement changes.

Google Analytics allows you to measure drop-off rates on your website. If you have an app, Amplitude does as well.

Inventory Turnover

Inventory Turnover is the rate at which inventory is sold and replaced in a given period.

Here’s how to calculate it.

Inventory Turnover = COGS / Average Inventory Balance

A low value here might indicate weak sales, or that you’re holding too much inventory. On the other hand, too high a turnover could signal a problem with frequent stock-outs, leading to lost sales.

If you want to know the average number of days it takes the business to sell its inventory, divide the number of days in the period by your inventory turnover over that same period.

One of the primary uses for this KPI is to help you make pricing decisions, but it can also be used to guide your purchasing, manufacturing, and marketing decisions.

For instance, a well-targeted marketing campaign may boost low inventory turnover without having to slash prices just to move stock. In addition, this KPI can be tracked at the SKU level, allowing you to prioritize the fastest-moving items in production and limit runs of dead stock.

Gross Profit Margin

Gross Profit Margin (GPM) indicates the efficiency with which a business turns its revenue into profit.

Here’s how to calculate your gross margin.

Gross Profit Margin (GPM) = (Revenue-Cost of Goods Sold (COGS)) / Revenue

Stable gross margins show that a business’s cash flows are stable. It can also be used to compare business models within the same industry. The reason for this is that players in the same industry tend to convert their assets into revenue at comparable rates.

As an owner, GPM is one of the key metrics you can use to identify areas for Revenue growth and cost cutting. A quick way to do this is by increasing prices, but you’ll want to proceed carefully to avoid alienating customers.

However, if low margins are due to an unreasonably high Cost of Goods Sold (COGS) and your competitors can deliver similar quality for a lower price, then you’re better off cost cutting in order to avoid losing market share and falling further behind on GPM.

Another way to increase Gross Profit Margin is to increase the average order value (AOV) of your existing customer base.

In short, a high Gross Profit Margin indicates efficient operations while a comparatively low result warrants a second look.

An important note here is that GPM reflects profit made before deducting SG&A. Subtracting these expenses will leave you with the net profit margin.

Revenue Growth Rate

Just as it sounds, your Revenue Growth Rate (RGR) is the increase (or decrease) in revenue over a given period. This is typically tracked on a monthly, quarterly, and annual basis.

Here’s how to calculate it.

Revenue Growth Rate = (Current Period Revenue - Revenue from Previous Period) / Revenue from Previous Period * 100

While RGR can tell you a lot about the effectiveness of your marketing efforts, customer retention strategy, and product offerings, it’s important to always consider this KPI in context. For example, a brand-new business can have an exceptionally high RGR with only modest increases in revenue month-over-month, while a more established business in a mature market will have a much lower RGR.

For larger businesses, segmenting RGR by product line or division can help owners refocus on what’s working and trim fat in their operations.

If you need help setting up these KPIs for your business or have any questions, feel free to reach out.

As always, I’m happy to help.

Putting It All Together

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

1. Being data-driven is important, but many owners aren’t sure where to start.

2. My recommendation is to keep it simple by selecting a few meaningful KPIs that truly guide decision-making.

3. The 6 that I recommend to get you started are Cash flow, Churn rate, Drop off rate, Inventory turnover, Gross profit margin, and Revenue growth rate.

4. However, you should make this list your own over time. If a KPI isn’t helping you run your business better, feel free to skip it.

Hungry for More?

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2. Book a call to learn how Scalable can transform your SMB.

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

‘Til Next Time,

Connor