KPI stands for Key Performance Indicator. The key word there is key. Not every number your business generates is worth tracking. In fact, tracking too many metrics is almost as bad as tracking none at all.
We have walked into businesses with elaborate dashboards showing 30 or 40 metrics. When we ask the owner which ones they actually use to make decisions, the answer is usually a shrug.
The Five KPIs Every Small Business Needs
1. Revenue Per Employee
Total revenue divided by number of employees. This tells you how efficiently your team generates income. If this number is declining, you are either overstaffed, underpricing, or your team is not being utilized effectively.2. Gross Profit Margin
Revenue minus direct costs, divided by revenue. This is your fundamental profitability metric. It tells you how much of every dollar you keep before overhead. Track it monthly and by service line if you offer multiple services.3. Accounts Receivable Aging
How long does it take you to get paid? The industry average varies, but if your average collection period is creeping up, you have a cash problem forming. We consider anything over 45 days a warning sign.4. Cash Runway
How many months can your business operate if revenue stopped tomorrow? Take your current cash balance and divide by your average monthly expenses. If the answer is less than two months, building cash reserves should be a priority.5. Customer Acquisition Cost
How much do you spend to get a new customer? Add up your marketing, sales, and business development costs for the month and divide by new customers acquired. If this number is higher than the first-year profit from that customer, your growth model is unsustainable.Industry-Specific KPIs
Restaurants
Prime cost percentage is king. Food cost plus labor cost divided by revenue. Target 60-65% for full service.Contractors
Job costing accuracy matters. Compare your estimated costs to actual costs on completed jobs. If you are consistently underestimating, you are consistently underpricing.Nonprofits
Program expense ratio shows what percentage of spending goes directly to mission work versus administration and fundraising. Donors and grant makers scrutinize this number.How to Actually Use KPIs
Set targets. A KPI without a target is just a number. Compare it to something. Your own prior performance. Industry benchmarks. Your budget.
Review them regularly. Monthly at minimum. Weekly for the most critical ones.
Act on what they tell you. If your gross margin dropped 3 points this month, find out why before next month arrives.
Keep it visible. The metrics you track should be accessible to the people who influence them. If your team does not see the numbers, they cannot help improve them.