January 20, 2022

Five Performance Indicators Every Small Business Should Use

Partner of ActionCOACH Spain, mentoring and business consulting expert. 

In our daily life, we ​​are used to seeing how any activity, however simple it may be, must always be accompanied by ratios or indicators that give us an idea of ​​what is happening. Many of us cannot imagine ourselves doing any activity in our daily life, no matter how simple it may be, without paying attention to indicators that allow us to make decisions (driving a car, a basketball game, school grades…).

However, I find that many companies don’t have any marker of what is happening in the company, despite the employer’s personal assets and the employees’ family support sometimes being at risk. And when markers do exist, entrepreneurs do not always know how to read and interpret said information to make correct decisions. This means in many cases a loss of productivity and margin that makes companies more fragile and less competitive.

Entrepreneurs must be educated in the “obligation” to use indicators as they normally do in their daily activities. This will allow them to have rigorous control of their activities. While there is an extensive list of potential markers, here are five basic indicators that you should have for basic but rigorous control of your activity.

1. Margin

Entrepreneurs should no longer talk about sales volume. You must start talking about margin or profit volume. Sales should not be an important indicator. We must exchange it for profit. At the beginning of the year, each company must define the volume of profit that it must have at the end of the year. That is why the term “benefit” must inherently carry the word “fixed.” “Fixed profit” means that the expenses will have to be adapted to what the sales volumes indicate. This means creating very flexible spending structures that allow us to adapt to changes in the market and very aggressive commercial actions. Therefore, we can go from the traditional formula that defines profit as income minus expenses and replace it for a new one: reviewable expenses equal income minus fixed benefits.

2. Balance Point And Optimal Point

Every entrepreneur must know the daily/weekly sales volume to obtain the break-even point, which is where the business covers expenses. But the most important thing is the optimal point, or volume of daily/weekly sales necessary to reach the end of the year, achieving the benefits defined as the goal at the end of the year. This extra accounting marker allows you to take corrective measures each day based on the results of the previous day. It gives extraordinary flexibility and leeway to reverse unwanted situations. This is a very useful tool without having to look at any accounting data.

3. Average Period Of Collection And Payments

The treasury is like gasoline for the car. If we don’t watch that marker and it runs out, the car stops working. It is vital to control the average collection period and the average payment period. You must mark an exact figure desired for each variable. The gap between both should be the minimum possible. Any difference to this scenario means that we become a lending bank and finance third parties. That should never happen, but unfortunately, it’s not always possible to avoid this. When it does happen, try to make it as little as possible and always monitor the ratios defined as optimal.

4. Profitability Of The Different Products/Services

The entrepreneur must make a continuous analysis of the contribution margin of each product within their portfolio as well as the weighting in sales for each of them. This is achieved with rigorous monitoring of the costs for each product or service. It serves to promote sales, with active sales policies, of those who really give a higher margin. Companies often sell products with great effort and little margin. Let’s focus on the selling margin.

5. Information From The Database

The database of a company is what I call “the map” of the company. It’s one of the most precious assets we have. With the database, if we know how to read it, we can obtain this information:

• Customer loyalty through recurring sales

• How to generate the most volume of profit by doing intense commercial work with clients that reinforce the best-selling products with more margin

• Cross-selling actions by customer segmentation

• Conversion rate for the implementation of corrective measures

In conclusion, the customer database should be another basic tool for the good management of the company.

There are countless key performance indicators (KPIs), but these could be five basic ones to be able to run our small businesses with the same control and oversight that we put into a basketball game or driving a car.

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