When running a company, it is essential to track key performance indicators or KPIs relevant to your daily business and help you manage it right. These metrics will help you understand how your company is doing and where it needs improvement. In this article, we will discuss the most important KPIs that every business should track. We will also provide tips on improving performance in each area and list the 20 most important KPIs to start with.
Understanding and tracking these KPIs allows you to make data-driven decisions that will help your business grow!
1. Revenue
Revenue is one of the most obvious metrics for a business, but many companies need to track it correctly. Revenue can be tracked daily or even weekly, but most companies need the accounting software to do this. As a result, they are mostly blind to how their company is doing financially.
3 ways to get more revenue
- Increase prices
- Offer more products or services
- Get more customers with marketing or sales activities
2. Gross Margin
The gross margin is another easy-to-understand metric to understand for a business. This metric tells you how much profit your company makes on each sale. It is calculated by taking the revenue and subtracting the cost of goods sold.
Calculation:
Gross margin = (revenue – cost of goods sold) / revenue
To improve your gross margin, you need to understand what is driving your expenses and find ways to reduce them.
3 ways to increase the Gross Margin
- Reduce the cost of goods sold
- Increase prices or use premium pricing strategy
- Negotiate with your suppliers
3. Net Profit Margin
The net profit margin is a more detailed version of the gross margin. It takes into account all company expenses, such as salaries, rent, and advertising. This metric is important because it tells you how much your company makes after all of its expenses are paid.
Calculation:
Net profit margin = (net profit / total revenues) x 100
A high net profit margin means that your company is generating a lot of profits, while a low net profit margin indicates that your company is not doing as well.
3 ways to improve the Net Profit Margin
- Reduce the cost of goods sold
- Increase prices
- Offer more products or services
4. Operating Profit Margin
The operating profit margin is a critical metric that tells you how profitable your company is from its core operations. This metric is important because it shows whether your company is making money from its day-to-day operations.
Calculation:
Operating profit margin = operating result/total income
A high operating profit margin means that your company is doing well, while a low margin indicates that your company is not doing as well.
3 ways to increase the Operating Profit Margin
- Reduce the cost of goods sold
- Increase prices
- Offer more products or services
4. Return on Assets (ROA)
The return on assets (ROA) is a crucial metric, especially for companies with lots of asset investment, that tells you how efficiently your company uses its assets to generate profits. This metric is important because it shows how well your company performs relative to its support.
Calculation:
ROA = net profit / total assets
A high ROA means that your company is excellently using its assets to make money, while a low ROA implies that your company could be doing better.
3 ways to get more revenue
- Reduce expenses
- Increase revenue
- Improve efficiency
5. Return on Equity (ROE)
The return on equity (ROE) is a key metric that tells you how effectively your company uses its shareholders’ money to generate profits. This metric is important because it shows how well your company performs relative to its shareholders’ investment.
Calculation:
Net income/average shareholders’ equity
A high return on equity means your company effectively uses its shareholders’ money to make money, while a low return on equity means your company could be doing better.
3 ways to get more Return on Equity
- Increase profits
- Decrease expenses
- Use debt financing
6. Return on Investment (ROI)
The return on investment (ROI) is a key metric that tells you how effectively your company uses its money to generate profits. This metric is important because it shows you how well your company performs relative to your invested money.
Calculation:
ROI = (net profit/investment costs) x 100
A high return on investment means your company is using its money well to make money, while a low return on investment means your company could be doing even better.
3 ways to get a better Return on Investment
- Increase profits
- Improve efficiency
- Invest in better technology
8. Dept to Equity Ratio
The debt-to-equity ratio is a key metric that tells you how leveraged your company is. This metric is important because it shows you how much debt your company has compared to its equity.
Calculation:
Debt-equity ratio = total liabilities/equity
A low debt to equity ratio means that your company is not as leveraged as other companies, while a high debt to equity ratio indicates that your company has greater leverage.
3 ways to get a better Dept to Equity Ratio
- Decrease liabilities
- Increase equity
- Restructure debt
9. Current Ratio
The current ratio is a key metric that tells you how liquid your company is. This metric is important because it shows how easily your company can pay its bills.
Calculation:
Current assets/current liabilities
High working capital means that your business is in a good financial position, while low working capital indicates that your business may not have enough money to pay its bills.
3 ways to improve the Current Ratio
- Decrease the amount of inventory on hand
- Collect receivables more quickly
- Increase the short-term borrowing
10. Inventory Turnover Ratio
The inventory turnover ratio is a key metric that tells you how quickly your company sells its inventory. This metric is important because it shows how efficiently your company uses its inventory to generate sales.
Calculation:
Inventory turnover = cost of goods sold/average inventory.
A high inventory turnover indicates that your company is selling inventory quickly, while a low inventory turnover means that your company needs to improve sales or reduce inventory. Improving the efficiency of your operations can help you increase your inventory turns.
3 ways to improve the Inventory Turnover Ratio
- Control inventory levels
- Reduce the average time goods are in stock
- Introduce just-in-time delivery
11. Accounts Receivable Turnover Ratio
The accounts receivable turnover ratio is a key metric that tells you how quickly your company collects money from its customers. This metric is important because it shows how efficiently your company uses its accounts receivable to generate sales.
Calculation:
Accounts receivable turnover = (net sales or total income) / average accounts receivable
A high accounts receivable turnover rate indicates that your company is collecting payments quickly, while a low accounts receivable turnover rate indicates that your company is not collecting payments quickly. This health check can help you determine if your company’s invoicing process is efficient.
3 ways to improve the Accounts Receivable Turnover Ratio
- Implement a collections policy
- Offer discounts to customers who pay early
- Invest in technology that allows for automated collections
12. Accounts Payable Turnover Ratio
The accounts payable turnover ratio is a key metric that tells you how quickly your company pays its bills. This metric is important because it shows how efficiently your company uses its accounts payable to generate sales.
Calculation:
Payables turnover ratio = cost of goods sold / average inventory of payables
A high payables turnover rate means that your company pays its bills quickly, while a low payables turnover rate means that your company does not pay its bills quickly.
3 ways to improve the Accounts Payable Turnover Ratio
- Negotiate better payment terms with suppliers
- Streamline the invoice approval process
- Implement a Vendor Managed Inventory system
13. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
EBITDA is a key metric that measures a company’s profitability. This metric is important because it shows how much money a company makes before paying interest, taxes, depreciation, and amortization.
Calculation:
Net income + interest expense + taxes + depreciation and amortization = EBITDA
Investors and public traders often use EBITDA to decide whether to invest in a company. If you are looking to invest in a company, you will want to make sure that the company is profitable and has a high EBITDA. This will indicate that the company is making a lot of money and is in good financial shape, but it also gives an unbiased view of the profitability. Due to tax optimization, some companies may look less profitable on the surface but have a high EBITDA.
3 ways to improve your EBITDA
- Reduce costs
- Increase revenue
- Improve operational efficiency
14. Free Cash Flow (FCF)
The free cash flow (FCF) is a key metric that tells you how much money a company has available to spend. This metric is important because it shows how much money a company has to reinvest in the business, pay dividends, or buy back stock.
Calculation:
Net cash flow from operating activities – investments = free cash flow.
The free cash flow can decide how much money the company should allocate for reinvestment and other purposes.
3 ways to improve the Free Cash Flow (FCF)
- Increase revenue
- Decrease costs
- Improve collection efficiency
15. Customer Acquisition Cost (CAC)
The customer acquisition cost (CAC) is a key metric that tells you how much a company spends to acquire new customers. This metric is important because it shows how much money a company pays to get new customers.
Calculation:
The total cost of customer acquisition / total number of customers acquired = CAC.
You can use the CAC to determine whether your company’s customer acquisition strategy is effective. A low CAC indicates that your company is doing well in acquiring new customers, while a high CAC demonstrates that your company needs to improve its strategy.
3 ways to improve the Customer Acquisition Costs (CAC)
- Improve the quality of leads through better targeting and lead nurturing.
- Increase the conversion rate through better design, user experience, and copywriting.
- Lower the cost per acquisition through better marketing efficiencies.
16. Lifetime Value of a Customer (LTV)
The lifetime value of a customer (LTV) is a key metric that tells you how much money a company can expect to earn from a customer. This metric is important because it shows you how much money a company can expect to gain from a customer throughout their relationship with the company.
Calculation:
Average revenue per user (ARPU) * average customer lifetime = LTV.
The lifetime value of a customer can help you determine the ROI of your marketing and sales efforts. If your business is able to acquire customers at a lower cost than LTV, your business will be profitable in the long run.
3 ways to improve the Customer Lifetime Value (CLV)
- Increase the frequency of purchases from existing customers.
- Offer discounts and loyalty programs to customers.
- Increase the average purchase amount from existing customers.
17. Churn Rate
The churn rate is a key metric that tells how many customers leave a company. This metric is important because it shows how many customers are leaving a company and how healthy its customer base is.
Calculation:
Number of customers lost in a period / total number of customers at the beginning of the period = churn rate.
Churn rate is one of the most important metrics for any business, as it indicates customer satisfaction and loyalty. A low churn rate indicates that customers are satisfied with your product or service and will remain loyal to you.
3 ways to improve the Churn Rate
- Reduce customer dissatisfaction
- Improve customer service
- Increase customer loyalty
18. Employee Retention Rate
Employee retention rate is a key metric that shows how many employees leave a company. This metric is important because it shows you how many employees are leaving a company and how healthy the company’s employee base is.
Calculation:
Number of employees leaving in a period / total number of employees at the beginning of the period = employee retention rate.
The employee retention rate is an important metric for any company, as it indicates how satisfied and loyal your employees are. A high retention rate shows that your employees enjoy working for you, while a low retention rate shows that employees are likely to leave the company in the short term.
3 ways to improve the Employee Retention Rate
- Promote from within whenever possible
- Encourage employees to take time off
- Provide opportunities for continued learning and development
19. Sales/Revenue per Employee
The sales/revenue per employee metric is a good relative KPI to optimize as it factors in a company’s headcount. This metric is important because it shows how much a company makes per employee.
Calculation:
Total sales/revenue / number of employees = sales/revenue per employee.
This ratio is important because it shows how efficiently a company makes money per employee. A high sales/turnover per employee shows that the company is successfully using its resources and making money, while a low ratio indicates room for improvement.
3 ways to get more Revenue
- Target new markets or expand into new product lines
- Build loyalty programs and lower prices to attract more consumers
- Generate more leads and convert a higher percentage of them into sales
20. Net Promoter Score (NPS)
The net promoter score (NPS) is a key metric that tells how likely customers are to recommend a company’s products or services to others. This metric is important because it shows how likely customers are to recommend a company’s products or services to others and how healthy the company’s customer base is.
Calculation:
Number of customers who rate the company as 9 or 10 on a scale of 0-10 / total number of respondents = Net Promoter Score.
NPS is essential for any business because it indicates customer satisfaction and loyalty. A high NPS shows that your customers are satisfied with your product or service and will recommend your company to others.
3 ways to improve your Net Promoter Score (NPS)
- Respond quickly to promoters and detractors
- Act on feedback to improve customer experience
- Thank customers for their feedback
Recap and the complete list of essential KPIs for companies
To be successful, a company needs to track and measure various key performance indicators (KPIs). While many different KPIs could be tracked and monitored, the most important ones are financials, customer experience, and employee engagement.
Each of these three categories has its unique set of KPIs that are essential for companies to measure to ensure they are on track and meeting their goals. In this article, we will go over the 20 most critical KPIs in each category.
List of the 20 most important KPIs for companies
- Revenue
- Gross Margin
- Net Profit Margin
- Operating Profit Margin
- Return on Assets (ROA)
- Return on Equity (ROE)
- Return on Investment (ROI)
- Debt to Equity Ratio
- Current Ratio
- Inventory Turnover Ratio
- Accounts Receivable Turnover Ratio
- Accounts Payable Turnover Ratio
- Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
- Free Cash Flow (FCF)
- Customer Acquisition Cost (CAC)
- Lifetime Value of a Customer (LTV)
- Churn Rate
- Employee Retention Rate
- Sales/Revenue per Employee
- Net Promoter Score (NPS)
