Are you tracking Key Performance Indicators (KPIs) for your service based business? If not, Q2 is an excellent time to start! By beginning to track important KPIs early in the year, you’ll be able to take proactive steps in order to improve your business and boost your bottom line. Best of all, you’ll be able to clearly see what’s working well in your business, what changes need to be made, and where explanation is needed.
Let’s start with the basics. What are KPIs and how do you choose which ones are best for your service based business?
Key Performance Indicators - also known as KPIs- are metrics that measure your business performance. The best KPIs are ones that are time bound, easily measurable, and directly pertain to your overall business goals. Because all businesses have different goals, all businesses should also aim to evaluate different KPIs. There are hundreds of possible KPIs out there, but not all of them are useful or even relevant, depending on your business type.
Here are some KPIs for Small Business Owners to Track
Profit Margin
While this KPI may seem basic, we’d be remiss not to highlight its importance as a KPI. Your profit margin is calculated by dividing your net income by your total revenue. This metric is important because it’s really easy for service based businesses to be focused on their total revenue and to forget about their bottom line. Your net profit margin will help you assess how your business is doing by telling you how much is left over after all of your expenses have been paid. If you find there isn’t much left over at the end of the day, you might be missing out on opportunities for growth. If this is the case, it’s important to make changes that will allow you the extra wiggle room to fund the business activities you need to be doing to scale.
Client or Customer Retention Rate
Your customer retention rate (CRR) is the percentage of existing customers who remain customers after a specific period of time. The period of time you use to measure your retention rate is up to you to decide, but it can be really helpful in determining how well your company is serving your customers. This metric isn’t relevant to all service based businesses. For example, those who the majority of customers are one time customers. However, if you have customers who utilize your services on a regular basis, this metric is especially important to track. Once you’ve calculated your CRR, consider whether your business is retaining customers well enough. If you think there is high turnover, it might be time to re-evaluate your strategies or implement different ways of sharing your success with clients.
Close Rate
How many consultations or estimates actually result in a prospect becoming a client? Understanding your Close Rate, or the percentage of sales leads that become clients, is important for strategizing your growth. Not only will this KPI tell you if changes are needed in your sales process, it will also help you understand what you need to do in order to scale your business. For example, if you keep a consistent close rate across different volumes of outreach, you may be able to accurately predict how many sales calls or estimates you need to do in order to add a new team member. This can help you keep your revenue growing at the same rate as your expenses and foster better cash flow overall.
Revenue Growth Rate
If you want to know how quickly or steadily your business is growing, Revenue Growth Rate (RGR) is a metric you should definitely track. RGR measures a percentage increase in revenue over a set period of time. Some common ways to evaluate this metric would be to look at your month-over-month increase in revenue. For example, how much did your business grow from January 2022-February 2022? What about from February 2022 to March 2022? Charting out your growth month by month can strengthen your projects and goals for the upcoming year. You can also evaluate your success historically and understand seasonal trends by comparing months from year to year. For example, calculating your RGR from January 2022 to January 2023.