As an entrepreneur you dream of your business’s growth right from the moment of its inception. You want to spread the wingspan of your business and make it soar high in the sky of happiness. But, as you already know, growing a business involves a lot of struggle and strife and that too in the right direction. Then, the question that arises is, “How to know whether you are directing your efforts in the right direction or not?” The best and the most appropriate answer to this question is – measuring KPIs.
Key Performance Indicators measure where your business is flowing with respect to the goals you aspire to achieve. Through the results, you can decide whether you should continue with your existing efforts or give them up and try something new that will bring in more positive results. For instance, let us assume that you want to reduce the employee absenteeism rate in your company. This is a common goal all companies pursue.
After all, reduction in employee absenteeism is synonymous to increased productivity, employee engagement and morale. You try different strategies but to know what works the best you need to have something that gives you a proper measure of success. That’s when a KPI related to employee absenteeism rate comes in. You see which strategies work, which don’t and move ahead in the direction of victory.
Here are the KPIs to measure for the growth of your business.
1. Customer lifetime value
Customer lifetime value as the name suggests is the amount that a single customer spends at your business over their lifetime in your organization. This Key Performance Indicator helps you determine how you are performing in the eyes of your customers. If your customers just shop once and then don’t return obviously it indicates that you are lacking somewhere when it comes to customer loyalty. However, if your customers consistently shop from you, obviously you are doing great when it comes to customer satisfaction and customer retention.
Customer lifetime value is measured with respect to cost of customer acquisition. If you spend more to acquire your customers but their lifetime value is less, then it indicates that your business is not yet on the profitable side. You need to see where you are lacking, why your customers don’t return regularly or what’s bothering them. If you already enjoy high customer lifetime value, you should keep up your efforts and relish the fruits of your hard work.
Formula for calculating customer lifetime value
You can calculate customer lifetime value by multiplying the average transaction amount by the number of repeat sales and average retention time.
Numerical example
Let us assume that an average customer spends $20 per week in your company or store. Then, if they stay with you for three years then their lifetime value is $3,120. You can compare this amount with average customer acquisition cost and see where you stand in terms of customer loyalty and profitability.
2. Revenue growth rate
Your revenue is a direct indicator of your organization’s growth and profits. The higher your revenue, the better your organization’s overall performance and the more growth you achieve. This makes revenue growth rate another important KPI that you should measure to estimate the growth of your company over time. The calculation of this key performance indicator is an easy one. There are no complex computations involved. Now, let’s proceed to discuss the formula for calculating the revenue growth rate.
Formula for calculating revenue growth rate
Subtract the revenue of the current period from the previous period. Then, divide the difference obtained by the revenue from the previous period. Lastly, multiply the term obtained by 100.
Numerical example
Let us consider that your revenue for the first quarter was $10,000 and your revenue for the second quarter is $15,000. Then the difference in the revenues of the two quarters is $5,000. Now, you have to divide 5,000 by 10,000 which gives you 0.5. Lastly, you have to multiply 0.5 by 100. The final result comes out to be 50%. So, your revenue growth rate is 50% which is great.
3. Employee productivity
Your employees are the building blocks of your company. Their productivity definitely impacts the overall performance and profitability of your company. If your employees are disengaged and don’t function well, can your organization survive in this highly competitive world? The answer is obviously a big no.
If you have to gain competitive advantage and soar in the sky of success, you should have a productive workforce. There is no other option available to you. Hence, employee productivity is another KPI that indicates the growth of your business. The more productive your workforce, the more your business will grow. That’s obvious.
Formula for calculating employee productivity
To calculate employee productivity, there is a very simple formula that you have to use. It is output divided by the input.
Numerical example
Let us assume that you have a content writer who writes 4,000 words in 8 hours. Then his productivity will be: output divided by input = 4000/8 = 500 words per hour. Now, there is no particular value that defines him as productive or unproductive. This depends entirely upon you. You have to decide whether 500 words per hour is good for you or not. If yes, well and good. If not, then, you should try to enhance the productivity of the particular employee.
4. Yearly sales growth rate
Without sales, a business can’t survive. That’s obvious. Then, how could there be no sales oriented KPI to keep an eye on when it comes to business growth? Yearly Sales growth rate is an important KPI that can extend massive support in measuring the growth of your business. When your yearly sales keep increasing, it is obvious that your business is growing and flourishing. So, this key performance indicator can be of great help to you.
Formula for calculating yearly sales growth rate
Subtract current year sales from last year’s sales. Then, divide the number obtained by last year’s sales. Lastly, multiply the term obtained by 100.
Numerical example
Let us say that your current year’s sales are worth $15,000. Last year’s sales are worth $10,000. Subtracting the latter from the former, we get ($15,000-$10,000) = $5,000. Now, dividing $5,000 by $10,000 (last year’s sales). We get – 0.5. Now, multiplying 0.5 by 100, we get 50%. Hence, the yearly sales growth rate is 50%.
5. Absenteeism rate
Absenteeism rate as the name suggests indicates the employee absenteeism rate in your organization. No doubt, everyone needs one or more leaves from time to time, if your workers remain absent from work for most of the time, it is obviously a cause of concern. Your company’ productivity and performance depends upon your workers. If they remain absent for most of the time, your company will suffer. Given that, it is important for you to keep a check on employee absenteeism rate in your company.
There is no standard value to indicate if your workforce absenteeism rate is acceptable or not. It entirely depends upon you. You have to see whether you can permit a particular level of employee absenteeism or not. If you find your organization’s absenteeism rate higher than what you expect, it’s time for you to identify the causes of high absenteeism and take suitable actions to eliminate them.
Formula for calculating employee absenteeism rate
To calculate employee absenteeism rate, you have to divide the total number of leaves taken by a particular employee in a given interval of time by the total number of working days in that particular interval of time. Then, you have to multiply the figure obtained by 100.
Numerical example
Let us consider that an employee took 5 days off out of 60 working days. Then his absenteeism rate will be (5/60)*100 = 8.33%.
6. Employee turnover ratio
Employee turnover ratio is also an important KPI that can help you measure whether your company is heading towards business growth or not. If most of your employees leave your organization quickly, it is obvious that your company will suffer. The suffering will come from multiple directions.
You’ll have to spend money on hiring and recruitment, suffer lost productivity as the new hire will take some time to reach the productivity level of the one who left and in case the new hire doesn’t shoulder his responsibilities well, you’ll have to suffer even more. Hence, it is beneficial to have a low employee turnover ratio.
Formula for calculating employee turnover ratio
Divide the number of employees who left working for your company by the total number of employees in your company.
Numerical example
Let us say that 5 employees left your company in the last 6 months and the total number of employees was 60. Then the employee turnover ratio will be (5/60) = 1/12 = 00833.
7. Net promoter score
Today, everyone knows the power of word-of-mouth marketing. People do not completely trust what you say about your products, services or brand. But they trust what your customers say about you. If your customers praise you then obviously there’s something good in you. The net promoter score indicates how likely your customers are to recommend your products and services to their friends, family members and other people they know. If most of your customers are likely to promote your products and services, it is certain that your business will flourish well. However, if your customers are unlikely to promote your products, services, it is time for you to see what’s wrong and bring the required changes.
Formula for calculating net promoter score
Net promoter score = Promoters’ percentage – Detractors’ percentage
You can know the promoters’ percentage and detractors’ percentage easily by conducting customer surveys.
Numerical example
Let us consider that from a customer survey you found that 70% of your customers are likely to promote your brand while 30% aren’t. Then, your net promoter score will be 40%.
8. Revenue per employee
Revenue per employee indicates how much money each employee is helping you make. It is an indirect indicator of employee performance. The performance of your employees is directly related to the growth of your company. If your workers aren’t productive, they won’t generate a good revenue obviously and your organization’s growth will be impacted. There is no fixed numerical value to help you know whether your revenue per employee is satisfactory or not. You have to yourself figure out if it is satisfactory keeping in mind your business’s size, the package of your employees and your overall revenue.
Formula for calculating revenue per employee
You just have to divide the total revenue generated by the size of your workforce.
Numerical example
Let us assume that your annual revenue is $10,000 and total number of employees is 10. Then, your revenue per employee will be (10,000/10) = $1,000 per employee.
9. Customer retention rate
Loyal customers they don’t just come back, they don’t simply recommend you, they insist that their friends do business with you. In a way, recurring customers are the source of your business’s stability. Moreover, they always encourage their friends, family members to try your products and services which gives an immense boost to your business. This way, loyal customers keep your business running in a fine fettle.
Hence, customer retention is one of the most important things you should focus on. Even if you don’t have a high customer acquisition rate but your existing customers keep returning, you’ll be on the profitable side. So, you should focus on customer retention and see where your efforts are leading you with the help of the key performance indicator, that we call – customer retention rate.
Formula for calculating customer retention rate
You just have to divide the number of existing customers by the number of customers at the start of the year and then multiply this term by 100. As you’ll also acquire new customers throughout the year, you should subtract the number of new customers from existing customers to know how many initial customers you retained.
Numerical example
Let us keep it simple. Consider that you had 100 customers at the start of the year, now you have 70 of them still with you. Then your customer retention rate will be (70/100)*100 = 70%. This is when you acquired no new customers. Let us say you acquired 10 new customers. Then, your customer retention rate will be: {(70-10)/100}*100 = 60%.
Conclusion
Growing your business is the number one goal you have as an entrepreneur. To fulfill this dream, you have to be persistent in your efforts while simultaneously measuring whether your efforts are producing the desired results or not. If you don’t measure your efforts, you won’t know whether you are moving in the right direction or not.
So, you should use some KPIs to measure the growth of your business. The above mentioned are some major KPIs that you should measure when it comes to business growth. After all, it is in the awareness of these KPIs that you can measure them and examine the progress of your organization from time to time.
