Using KPIs as Your Ticket to Growth
Let us guess—One of your business goals for 2017 is growth.
We see measuring analytics as an essential tool to scale your business. And, if you are a loyal reader, you know we never go too long without writing about our beloved metrics. However, do you know which metrics are essential to your business and the stage of growth you are in? Here is a breakdown of some of the Key Performance Indicators (KPIs) for growth in common business models.
The term KPI is thrown around a lot in business jargon and blogs, but in case it is a new concept for you and your business, here is a nice definition from web analytics software developer Klipfolio: “A KPI is a measurable value that demonstrates how effectively a company is achieving key business objectives.”
What KPIs Should I Be Measuring?
It is important to note that while you might hear about this KPI or that return on investment (ROI), not all are effective measures if you are not at the right stage of growth. Metrics without context are useless. You do not need to be drowning in data in order to learn from it. In fact, it is probably better not to. Focus on the one or two KPIs that are most relevant to scaling your business and you will be a lot more likely to see results. In Lean Analytics by Alistair Croll and Benjamin Yoskovitz, this is referred to as “the One Metric That Matters.”
We are a big fan of Lean Analytics, and if you are a startup, entrepreneur or scaling your business, this book is not to be ignored; however, here is the Cole’s Notes version to help you get the gist:
“…By knowing the business you’re operating in and the stage you’re at you can track & optimize the metric that matters to your business at that stage. This can help overcome risks and avoid premature growth.”
In other words, you want to know what stage of growth you are in and which KPIs for growth are most relevant to you.
Not all KPIs are appropriate for your specific business. If you have a Software as a Service (SaaS) business model, your KPIs for growth are going to be different than if you are a real estate investment firm. Start with sorting out which business model you are operating and then you can determine which metrics you should be optimizing in order to scale profitably.
In the business of outsourced accounting we come across all sorts of models and therefore the analytics we employ with our clients vary greatly. Here are a few of our “go-to” KPIs for three of the most common business models:
E-Commerce / Product-Based Business Model
- Gross Profit Margin
A question that comes up a lot is whether aiming for a 50% Gross Profit Margin is a good blanket rule. The answer is no, not really. It is dependent on your business and its overhead costs. Another component that is often overlooked is the working cash cycle. If you are offering a product that you are invoicing for, you may want to have a higher margin to cover late payments. If you are just starting out selling a physical product, you normally want to markup 300%; however, there are different rules of thumb for different types of models & sales channels.
- Inventory Turnover Rate
You want a quick sales cycle so you are not sitting on unsold inventory. This equals better cash flow, which as you know from our earlier post, is great for impressing your investors!
Service-Based Business Model
- Billable Utilization Rate
- Project or Client Margin
If you are a law firm, IT or other service company you are probably already familiar with Billable Utilization Rate; however, you should also be monitoring all of your Project/Client Margins to really focus on scaling. Similar to the Gross Profit Margin, the Project or Client Margin for a service-based model is the revenue — the cost of the employee wages-other direct costs divided by revenue. This gives you the percent of profit you make on each client or project from the service provided.
Software as a Service (SaaS) Business Model
- Lifetime Value/Customer Acquisition Cost Ratio
To break it down a little more, because these particular metrics are not always as obvious in our financials: the Customer Acquisition Cost (CAC) is found from taking your total expenses over a given amount of time, (normally a month) and dividing that by the number of new customers in the same length of time. You will notice that these KPIs would also be relevant to a product-based or e-commerce business model, as well.
Customer Acquisition Cost (CAC)
Lifetime Value (LTV)
Lifetime Value is your monthly recurring revenue (MRR) multiplied by Gross Profit percent multiplied by the number of lifetime months. It is common to see a Gross Profit of 80% or higher in SaaS models. Let us use Dropbox as an example. Their margin may seem high if they are charging $9.99/month; however, there are some less obvious costs: payment processing, server usage, customer support costs etc.
Finally, take your LTV divided by your CAC and you have got your ratio. Aim for a ratio of 3 or greater to see optimal growth.
- Payback Period (PBP)
It is your cycle of cash and it is our favorite forgotten metric: your Payback Period (PBP). You can dive into more detail in this post, but it is similar to inventory turn. A key takeaway is to keep your PBP at 12 months or less. Meaning if a PBP is 12 months, it took you 12 months to recoup your costs for that customer. Returning back to our Dropbox example: Why do they offer a 20% discount to pay upfront for a year? They have a better PBP if they get the cash immediately versus waiting for 12 months to receive all of your monthly payments.
What you might have noticed, is that even if your business model is not exactly E-Commerce, SaaS or Service, that you can still map a relevant metric to one of the above formulas and tweak that KPI to make it work for your scaling business. Once you understand which KPIs for growth are best for your business and the stage of growth you are in, you can strategize around them. Do that and you won’t just talk the “growth” talk, but you’ll be walking the “growth” walk.
The start of the new year means exciting new changes for Red Granite. Beginning January 1, you’ll find us online at www.orba.com now that we’re part of one of Chicago’s most prestigious CPA firms, Ostrow Reisin Berk & Abrams, Ltd. While we’re saying goodbye to our old website and company name soon, we want you to know that we’re still right here to serve all your bookkeeping, accounting, and strategic financial needs. In fact, with our ORBA colleagues, we’re positioned to offer you an expanded array of state-of-the-art services. So set your sights high for 2017 and sign up to receive our latest blogs and newsletters. Visit us today, we’re looking forward to welcoming you!
For more information, contact Chris Arndt at email@example.com or call him at 312.494.7014. Visit ORBA.com to learn more about our Cloud CFO Services.
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