10 KPIs for Small Businesses

Key performance indicators (also known as KPIs) serve as a guide for small business growth. They’re an integral part of business planning and can greatly impact the strategic aspects of the business, such as the annual planning process.

Choosing the right KPIs for your small business helps create a road map, ensuring all your teams are working toward clear, compelling, and audacious goals. These KPIs are ideal to drive results for small businesses.

The Benefits of KPIs for Small Businesses

When a business is in its early stages, it must focus on strategic growth. Tracking KPIs allows a business to focus and align its work using goals that prioritize significant returns. This way, teams pay attention to what matters instead of getting distracted by vanity metrics. In addition to providing proof of success, KPIs can act as an early warning of potential problems. Having agreed-upon targets that signal when something is wrong can help you spot inefficient processes or team dysfunctions. 

As your KPIs cascade throughout your organization, every team has a big picture to work toward. This process helps establish high engagement so employees can see how their day-to-day tasks connect with the overall performance of your business.

How to Choose the Right KPIs for Your Small Business

Choosing the right KPIs to track for your small business depends on your business goals. Focus on actionable and measurable metrics. New businesses typically focus on their business model, cash flow, and growth at first. More established small businesses focus on other key metrics, such as cost per acquisition and customer lifetime value.

If you don’t know what KPIs to track for your business, take Ninety’s Stages of Development Assessment. This assessment determines the current status of your business and how you can progress to the next level.

The Top 10 KPIs for Small Businesses to Track

1. Revenue Growth   

For Stage 1 and Stage 2 businesses, growth should be the priority. Businesses either grow or die, and revenue growth provides a clean line of sight into your efforts to scale. This metric reflects how well you attract customers and expand, and it can be tracked over set time intervals to identify trends and predict future performance. However, since expenses are not included in this calculation, it can’t be used to evaluate the overall health of a business.

Here’s the formula for calculating revenue growth:

Revenue growth = (Current period revenue – Previous period revenue) ÷ Previous period revenue

2. Lifetime Value of a Customer

As you work to attract new customers, it’s vital to understand what each business relationship is worth. This KPI helps you understand the spending patterns of your average customer, guiding your marketing budgets and strategies. It also helps you gauge the long-term viability of your customer relationships. If the number is low, your business can brainstorm new ideas to bring customers back through your doors. Ask yourself, “Are there any new products or services that can extend our business relationship?”

Here’s the formula for calculating the lifetime value of a customer:

Lifetime value of a customer = Customer value (how much they spend per year) x Average customer lifespan (how long customers typically stay with your company)

3. Customer Acquisition Cost

Another key performance indicator that guides your sales and marketing goals is your customer acquisition cost. This helps you understand how much your business invests to bring new customers in the door, helping to optimize your processes. If this number is too high, consider adjustments to your marketing strategy. How can you best connect with your Ideal Customer? How does your service or product solve their major pain points? Is your marketing spend providing an adequate return on investment? Investigating these questions can help you find significant weaknesses in your sales and marketing processes.

Here’s the formula for calculating customer acquisition cost:

Customer acquisition cost = Sales and marketing expenses ÷ The number of new customers

4. Cash Flow

Cash flow is the lifeblood of small businesses. Running out of cash can stop your business in its tracks, so focusing on cash flow allows you to drill down to the core of your business. If cash flow is volatile, we recommend putting more money into an emergency fund to help you weather unexpected expenses or economic downturns. This KPI can also help you gauge when to hire, add locations, and improve your product offerings.

Here’s the formula for calculating your cash flow:

Cash flow forecast = Beginning cash + Projected inflows – Projected outflows

5. Customer Churn Rate

Your customer churn rate is an excellent KPI to monitor in the early stages of your business. It provides an early indication of customer dissatisfaction and can help you quickly pivot or adjust product development. If your churn rate rises, you should consider scheduling customer exit interviews to understand why they’re leaving. This can help you improve customer satisfaction in the early stages of your small business.

Here’s the formula for calculating your customer churn rate:

Customer churn = (Lost customers ÷ Total customers at the start of the time period) x 100

6. Net Profit Margin

Net profit margin helps you evaluate the sustainability of your business by showing the percentage of revenue left after all expenses, including operating costs, taxes, interest, and other nonoperating expenses. A consistent net profit margin indicates that your business has a cushion to absorb unexpected costs and market corrections, while low net profit margins suggest that you need to take a look at ways to cut costs and increase your net profits.

Here’s the formula for calculating your net profit margin:

Net profit margin = Net profit ÷ Total revenue x 100

7. Gross Profit Margin

The gross profit margin is the measure of profit on each dollar of sales before expenses. This ratio is calculated by looking at the difference between production costs while excluding recurring costs like overhead, payroll, and taxes. Gross profit margin helps you monitor your production processes and discover inefficiencies. If your margin looks low, you can pull a few different levers, including lowering the cost of goods, automating processes, or increasing prices. Businesses typically monitor their gross profit margin over time, and frequent changes can flag issues with your supply chain or sales process, helping you get ahead of challenges further down the line.

Here’s the formula for calculating your gross profit margin:

Gross profit margin = (Total revenue − Cost of goods sold) ÷ Total revenue

8. Revenue or Profit per Employee

When looking to expand your business, this KPI is essential. It helps you understand how your number of employees impacts overall revenue and also helps measure productivity. It also evaluates the efficiency of your business and how well it leverages your team members. If the profit per employee is low, your employees may not be focused on the right outcomes, and it may be time to reallocate resources toward the profit centers of your business, which are typically your Sales and Marketing teams. Cultivating a learning-centric culture can also help improve this metric, as employees can upskill and focus those new talents on driving growth.

Here’s the formula for calculating the revenue or profit per employee:

Revenue = Company’s total revenue over the specific time period ÷ Total number of full-time employees

9. Enterprise Value

As its name implies, enterprise value is the total value of a company (an enterprise), including its market capitalization, short- and long-term debt, and any cash on the company's balance sheet. In most companies, leaders are incentivized to hit financial goals based on short-term outcomes for improvements in business performance. However, great company builders embrace a different approach to enterprise value creation — one linked to a company playing the long, if not infinite, game. This requires a deeper understanding of value creation, leading to our need to confidently calculate or assess your company’s enterprise value.

Here’s the formula for calculating your enterprise value:

Enterprise value = Market capitalization + Total debt − Cash

10. Rule of 40

For software companies, another impactful KPI to monitor is the “rule of 40.”  Privately held SaaS companies have a unique financial profile, so this rule helps to assess their efficiency. It’s an essential metric to keep in the back of your mind, as it’s what investors will look at as you begin to explore acquisitions or exit planning. Your Senior Leadership Team can use this KPI to ensure that they remain focused on profitability over growth. While early-stage businesses often prioritize expanding their customer base and increasing revenue, profitability is the ultimate metric when it comes time for the next round of funding or potential acquisitions. This KPI helps keep SaaS companies focused on what matters most.

Here’s the formula for calculating the rule of 40:

Rule of 40 = Year-over-year growth percentage + Profit margin percentage = 40% (or more!)

Grow Your Small Business with KPI Tracking

Though there are numerous KPIs that small businesses can track, these top 10 provide essential financial, go-to-market, and productivity metrics to guide your next steps.

In order for your business to be successful, you should focus on KPIs that align with your goals. The KPIs we mentioned will get you to the next Stage of Development and beyond.

For more information on how to grow your business, explore our Grow or Die series.