Key Performance Indicators (KPIs) for Small Businesses: What to Measure and Why

Did you know that only about 50% of small businesses survive past the five-year mark?¹ One primary reason they fail isn’t a lack of passion or effort; it’s the absence of measurable data to guide decision-making. That's where key performance indicators (KPIs) come in. KPIs are essential to a successful business strategy, as they track performance and help you identify what's working (and what's not). Whether aiming to boost sales, improve customer satisfaction or streamline operations, KPIs provide a clear roadmap to success. Here, we'll go over some of the most important KPIs to track and how to make sure they support your business objectives.

What Are Key Performance Indicators and Why Do They Matter?

A key performance indicator (KPI) measures how effectively a business achieves key objectives. It's used to evaluate success at reaching specific targets, whether those are tied to sales, marketing, customer service, operations or overall business performance.

When a small business sets strategic goals, KPIs serve as the measurable analytics and benchmarks that indicate whether those goals are being achieved. Although strategic goals tend to be broad (e.g., “grow revenue” or “improve customer service”), KPIs turn them into specific, trackable targets (e.g., “increase monthly revenue by 10%” or “achieve an average customer satisfaction score of 8/10”). They can also help your workforce understand how their efforts align with your business goals. 

KPIs differ slightly from general metrics, which provide data but don't necessarily reflect whether your business is achieving its strategic goals. For example: 

• Metric: Number of website visitors
• KPI: Website conversion rate (e.g., percentage of visitors who make a purchase)

KPIs can be used across three organizational levels: company-wide, department-level and project or sub-department. This allows SMBs to focus on localized business goals alongside the big picture.

• Company-wide KPIs help track overall business health and performance across all departments. However, they can be broad and require more specific performance metrics to spark change.
• Department-level KPIs are more specific and can provide insight into why business performance is what it is. 
• Project or sub-department KPIs go even further and can provide extremely specific data sets to measure progress or understand outcomes. 

Business leaders can start with company-wide options and narrow down specific KPIs based on the company's performance or departmental success.

14 Important KPIs Every Small Business Should Track

Small business owners should track metrics and key performance indicators based on overall goals and long-term vision. In doing so, you can better understand what's working and what's not, allowing you to change your strategic plan to better align with long-term business success. Some of the most crucial small business metrics and KPIs businesses should track include the following.

1. Revenue Growth

This falls under key financial metrics and KPIs that can provide SMBs with essential information on business health and momentum over time. It measures how much your business's income increases over a specific period (monthly, quarterly or annually). 

• How to track it: (Current Period Revenue –Previous Period Revenue) ÷ Previous Period Revenue × 100
• Example: If revenue grows from $50,000 to $60,000 in one quarter, your revenue growth is 20%.

2. Gross Profit Margin

This allows you to determine how much of the revenue you profit from, after subtracting the cost of goods sold (COGS). COGS includes any direct costs associated with producing the goods or services a business sells, including raw materials, manufacturing costs, overhead and the cost of labor. It's one of the common KPIs to measure efficiency. 

• How to track it: (Revenue – COGS) ÷ Revenue × 100
• Example: If your revenue is $100,000 and your COGS is $60,000, your gross profit margin is 40%.

3. Net Profit Margin

Net profit is the amount of profit that's left after deducting all business expenses. This is one of the KPIs that can help you determine the long-term success of your business.

• How to track it: NetProfit ÷ Revenue × 100
• Example: If you earn $20,000 in net profit on $100,000 in revenue, your net profit margin is 20%.

4. Cash Flow

Cash flow is the total amount of money (cash and cash equivalents) transferred into and out of a business. To monitor this, it's recommended that SMBs keep monthly or weekly cash flow statements and review them regularly to identify any issues.

5. Customer Acquisition Cost (CAC)

This represents the amount of money (on average) it costs to acquire a new customer. It's measured through sales and marketing costs. 

• How to track it: Total Sales and Marketing Costs ÷ Number of New Customers Acquired 
• Example: If you spend $2,000 on marketing and gain 50 new customers, your CAC is $40.

6. Customer Lifetime Value (CLV or LTV)

This represents the total revenue expected from a customer over their relationship with your business.

• How to track it: Average Purchase Value × Purchase Frequency × Customer Lifespan
• Example: If customers spend $100 monthly for 12 months, CLTV is $1,200.

7. Operating Expenses Ratio

This is a financial metric to track the operational efficiency of an SMB. It shows you the proportion of revenue spent on operational costs and can help with budgeting and cost control.

• How to track it: Operating Expenses ÷ Revenue × 100
• Example: If your monthly expenses are $30,000 and revenue is $100,000, your operating expense ratio is 30%.

8. Inventory Turnover

This is a leading KPI to measure how quickly inventory is sold and replaced. It can help you better understand your SMB's efficiency in managing its goods.

• How to track it: COGS ÷ Average Inventory
• Example: If your annual COGS is $200,000 and your average inventory is $50,000, your inventory turnover is 4.

9. Accounts Receivable Turnover

This KPI can help you understand how well your SMB handles debt collection and credit management. It measures how quickly you collect payments from customers who purchase on credit or clients with outstanding invoices.

• How to track it: Net Credit Sales ÷ Average Accounts Receivable
• Example: If credit sales total $150,000 and average receivables are $30,000, your turnover ratio is 5.

10. Website Traffic

This is more of a marketing metric that allows you to calculate other key elements of your marketing strategies. It counts the number of users who visit your website. You can use tools to help determine the success of a digital marketing effort. For example, seeing a 20% increase in monthly website visits can help indicate that you're doing something right.

11. Conversion Rate

The conversion rate is a stronger KPI when identifying sales performance, as it shows the percentage of website visitors who take a desired action (i.e., make a purchase or sign up for your email list). 

• How to track it: (Conversions ÷ Total Visitors) × 100
• Example: If 100 out of 2,000 visitors make a purchase, your conversion rate is 5%.

12. Customer Retention Rate

This is the percentage of employees who continue doing business with you over a specific period. 

• How to track it: ((Customers at End – New Customers) ÷ Customers at Start) ×100
• Example: If you start with 200 customers, add 50 new ones, and end with 220, your retention rate is 85%.

13. Employee Productivity

This is one of the most critical businesses KPIs, as it can give you strong insight into your workforce. High productivity typically equates to higher employee satisfaction, lowering turnover. Depending on your industry, it can be a bit trickier to track. One formula is:

• How to track it: Output (e.g., revenue or completed tasks) ÷ Number of Employees or Hours Worked 
• Example: If a team of 5 generates $100,000 in one month, the average productivity per employee is $20,000.

14. Social Media Engagement

Many small businesses don't focus on marketing KPIs, but social media engagement is becoming increasingly important. Specifically, this KPI reflects how actively users interact with your content through likes, shares, comments and follows.

• How to track it: Use platform analytics to measure engagement rate: (Engagements ÷ Impressions or Followers) × 100
• Example: If a post has 1,000 views and 50 interactions, the engagement rate is 5%.

How to Choose the Right KPIs for Your Business

You don't need to meticulously track every KPI to understand your business's progress. In fact, choosing the wrong ones can lead to wasted effort and misleading insights. Some tips to help you choose which metrics to track include the following:

• Align KPIs with your strategic goals; identify your business objectives and track KPIs based on those. Track revenue growth and customer acquisition if you want to grow your business. Track operating expense ratios and inventory turnover if you want to increase efficiency.
• Focus on actionable metrics that highlight gaps, resource allocation or marketing success.
• Consider your industry and business model; retail businesses may prioritize inventory, while e-commerce companies should focus on conversion rates.
• Don't overcomplicate it. Start with five to ten KPIs and see how things go.
• Reassess your needs regularly. Review KPIs quarterly or annually to determine whether they still support your goals.

Remember, tracking KPIs is just one piece of the puzzle. Small businesses also need reliable support to scale efficiently and sustainably, from HR and payroll to benefits and compliance. That’s where TriNet comes in.

TriNet provides comprehensive HR solutions that empower small businesses to focus on what they do best, while gaining the tools and insights needed to thrive. Contact us today to learn how industry tailored HR services can help you track what matters and grow with purpose.