KPIs for Small Business Owners
There is no single set of KPIs that suits every small business. A useful set is short: a handful of measures covering profit, cash, sales, efficiency and customers, each with a clear definition, an owner and a target. Pick the ones that tell you when to act, and drop the rest.
What is a KPI in business?
KPI stands for key performance indicator. It is a number you track regularly because it tells you whether the business is moving in the direction you want. "Key" is the important word. A KPI is not every number you can pull from your software. It is the few that, if they moved the wrong way, would change what you do.
A good KPI has five features:
- A definition everyone agrees on. "Gross margin" means one thing, calculated one way, every month.
- A source. You know which report it comes from, so it can be repeated.
- A target or a range. Without one, you cannot tell good from bad.
- An owner. Someone is responsible for explaining it.
- A decision attached. If it moves, you know what you would do.
Which KPIs should a small business track?
The honest answer is "it depends on how you make money". What follows is a menu, grouped by what each measure tells you. Choose from it rather than tracking all of it.
Profit and margin
| KPI | How to calculate | What it tells you |
|---|---|---|
| Gross margin | (Revenue minus direct costs) divided by revenue | Whether pricing covers the cost of delivery. See what is gross margin |
| Operating profit margin | Operating profit divided by revenue | Whether the core business pays for its overheads |
| Net profit margin | Net profit divided by revenue | What is left after everything |
Cash
| KPI | How to calculate | What it tells you |
|---|---|---|
| Cash balance | Bank balances at month end | What you can spend now |
| Cash runway | Cash divided by average monthly cash burn | How many months you can operate at the current rate |
| Accounts receivable days | Receivables divided by credit sales, times days in the period | How slowly customers pay |
| Accounts payable days | Payables divided by purchases, times days in the period | How long you take to pay suppliers |
Profit and cash can move in opposite directions, which is why both appear on the list. See profit vs cash flow.
Sales and growth
| KPI | How to calculate | What it tells you |
|---|---|---|
| Revenue growth | This period minus last period, divided by last period | Direction of the top line |
| Sales pipeline value | Value of open quotes or proposals | Potential future revenue |
| Average sale or job value | Revenue divided by number of sales | Whether you are moving up or down in price |
| Recurring revenue (where you have it) | Monthly fees under ongoing agreements or subscriptions | How predictable income is |
Efficiency and people
| KPI | How to calculate | What it tells you |
|---|---|---|
| Revenue per employee | Revenue divided by headcount | Rough productivity |
| Labor cost as a share of revenue | Payroll cost divided by revenue | Whether staffing keeps pace with sales |
| Utilization (service firms) | Billable hours divided by available hours | How much time earns money |
| Overhead as a share of revenue | Operating expenses divided by revenue | Whether fixed costs are creeping up |
Customers
| KPI | How to calculate | What it tells you |
|---|---|---|
| Customer acquisition cost | Sales and marketing spend divided by new customers | What it costs to win a customer |
| Customer retention rate | Customers kept (excluding new customers won in the period) divided by customers at the start | Whether people stay |
| Revenue concentration | Revenue from the largest customer divided by total revenue | How exposed you are to one account |
How do I choose which ones to track?
Work through four steps.
- Start with how you make money. A restaurant lives on food cost and labor. A consultancy lives on utilization and receivable days. A contractor lives on job margin and cash timing. A subscription business lives on retention.
- Pick one or two from each of profit, cash and sales. That gives you a balanced base.
- Add one or two specific to your model. For example, job margin for a contractor or repeat-customer share for a shop.
- Test each one with a question: "If this moved a lot, what would I do?" If you have no answer, remove it.
Revisit the list once or twice a year. As the business changes, so should the measures.
A simple KPI dashboard template
You can copy this layout into a spreadsheet. One row per KPI, one column per month. It does not need software.
| KPI | Definition and source | Owner | Target | Jan | Feb | Mar | Trend | Action if off target |
|---|---|---|---|---|---|---|---|---|
| Gross margin | (Revenue minus direct costs) divided by revenue, from the profit and loss statement | Owner | Set by you | Review pricing and supplier costs | ||||
| Cash balance | Month-end bank balances | Owner | Set by you | Review receivables and upcoming bills | ||||
| Receivable days | From the aged receivables report | Bookkeeper | Set by you | Chase overdue invoices | ||||
| Revenue growth | Month over month, from the profit and loss statement | Owner | Set by you | Review the sales pipeline | ||||
| One KPI specific to your model | Write the definition | Name | Set by you | Write the action |
Fill the targets from your own history and plan, not from a figure you saw elsewhere. A benchmark from another industry or a bigger business can mislead you.
Why do KPIs fail?
- Too many. Too many measures and none gets attention.
- Vanity measures. Website visits or social followers without a link to revenue.
- No definition. Two people calculate the same KPI differently.
- Built on messy books. If transactions are miscoded, every ratio is off. A KPI report needs reconciled bookkeeping underneath.
- No review rhythm. A dashboard nobody discusses changes nothing.
- Targets with no basis. Pick targets from your own numbers and your budget.
Do I need KPI software?
Not at first. QuickBooks and Xero produce the underlying reports, and a spreadsheet can hold the dashboard. Software may become useful when you have many locations or data sources. The thing that matters first is the definitions and the monthly habit.
Who should set up KPIs for my business?
Many owners can do the first version themselves with the template above. If you want help choosing the right measures, tying them to the books and reviewing them each month, that falls under KPI development in the fractional CFO service, with the monthly reporting side under a fractional controller and management reporting. The numbers themselves come from steady bookkeeping. Read what is management reporting and how to read a profit and loss statement for the background.
It is not worth paying for formal KPI development if you have one or two revenue lines, a handful of costs and a clear view of your own numbers. A simple monthly look at profit and cash may be enough. It starts to pay off when the business is growing, margins are unclear, or you are preparing for a loan, a hire or a major purchase.
English Oak starts at $1,500 a month for controller work and $2,500 a month for CFO work, custom, as one fixed monthly fee. Details are on the pricing page and in what we do. This is general information, not tax or investment advice. English Oak does not prepare tax returns, audit or give investment advice, and works alongside your own tax professional.
New to a term used here? Our small business finance glossary defines it in plain English.
Need this done for you? See our Fractional CFO & Advisory service, or pricing. English Oak Financial does not prepare tax returns, perform audits or give investment advice. This guide is general information, not tax, legal or investment advice.
Related pages
Common questions
How many KPIs should a small business track?
A short list tends to work better. Fewer can miss a problem area; more and the list stops getting read.
What is the difference between a KPI and a metric?
A metric is any measurement. A KPI is a metric you have chosen because it is tied to a goal and a decision. All KPIs are metrics, but most metrics are not KPIs.
What KPIs should a service business track?
Typical choices are gross margin, utilization, receivable days, revenue per employee and customer retention. Choose from the menu above based on how your own business earns money.
What is a KPI dashboard?
A single page that shows your chosen KPIs, usually month by month with a target and a trend. It can be a spreadsheet or a report from your accounting software.
Are KPIs the same as financial statements?
No. Financial statements such as the profit and loss statement and balance sheet record results. KPIs are ratios and measures drawn from them, and sometimes from other data, to guide decisions.
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