Key performance indicators (KPIs) are very important metrics used by small business owners to evaluate how their business is performing. They offer a concrete look at the state of an organization. KPIs allow small business owners and managers to analyze their business by comparing common measures over time. By examining your small business’s KPIs, you can see an in-depth picture of your organization.
Read on for a look at three key KPIs you can use to learn about the health and performance of your small business.
Gross Profit Percentage (GPP)
GPP is one of the most important measures for determining the profitability and financial performance of a business. It reflects the efficiency of the company in terms of how it makes use of its labor, raw material, and other supplies. To calculate your organization’s GPP, take your total sales, subtract total productions costs (i.e., total labor, materials, and overhead costs), then divide by total sales.
A small business’s GPP is one of the metrics that a bank looks at when the business is seeking financing. The bank’s decision will be influenced by whether your business’s GPP falls within the standard range for its sector. Click here for a helpful article that offers an overview of standard GPPs by industry. If your business’s GPP falls below the standard range for your sector, you should take the time to figure out what is happening and remedy it. Perhaps you are spending too much on inventory—maybe you need to examine your vendors and shop around for better prices. If you are having difficulty determining what the issue is, reach out to your accounting advisor for help with troubleshooting your situation.
Your organization’s operating margin is a good indicator of how efficiently you are generating profit through your core operations. To calculate your business’s operating margin, take your operating income (net sales minus both your cost of goods sold and your operating expenses) and divide it by your net sales.
Generally, a higher operating margin is considered superior to a lower one. This metric is helpful in comparing your business against your direct competition. It is not good for comparing your business against organizations in different industries.
Net Profit Margin
This KPI is one of the most important indicators of your organization’s overall financial health. Net profit margin (NPM) is an expression of how much profit you generate as a percentage of revenue. To calculate your NPM, take your net sales and subtract (1) your cost of goods sold, (2) your operating expenses, and (3) any additional gains or losses. Divide the resulting number by your net sales.
A business’s NPM is often requested by potential investors looking to analyze the health of a business. They use the NPM to assess if the organization is generating sufficient profit from its sales and if it has a strong rein on its operating and overhead costs.
You should be sure that you are taking full advantage of the KPIs that can best inform you about how your small business is doing. If you do not already do so, initiate a monthly recurring meeting with your accounting advisor and any key managers at your organization that focuses on examining your KPIs. Regularly tracking your KPIs is the best way to know that you are making informed decisions regarding your business operations.