A deep insight into your business performance can inform your business decisions. Subsequently, your business Key Performance Indicators (KPIs) will drive actions because whatever that gets measured, gets managed as well.
This article recommends 7 KPIs to measure your business performance. These are common KPIs that you can use to start measuring your business health – the list is by no means exhaustive measuring performance, it can be used to identify potential areas of improvement. For every product that you have, you want to measure the profit that you are making from each of them. This is called the gross profit margin and tells you if you are getting a big cut from selling this product.
You will also need to know the percentage of your revenue that is actually profit. That is called the profit margin.
1. Gross Profit Margin
This measures the profit that you are making on every unit that is sold. It excludes operating costs, e.g., rent and marketing, so you’re only taking into account the cost of producing the product.
Are you willing to sell certain items at low gross profit margin, in return for volume?
The components of gross profit margin are product selling price and total costs of production. Your POS system may generate product sales reports that show gross profit margin of each product. From this information, you can make several decisions, whether to increase total sales by increasing the product pricing or reducing product discounts, and find ways to reduce purchasing costs
2. Profit Margin
measures the profitability of your business. It indicates the percentage of sales that are left over after all the expenses of the store is paid for. Basically how much moolah you can keep in your pocket or distribute amongst your partners.
The components of profit margin are revenue (total sales) and costs.
A low-profit margin indicates that either your revenue is low, your expenses are too high, or both. Here are some questions to consider when this happens:-
“How can I cut down on my costs (logistics, procurement costs, administration costs etc)?”
“How can I increase my sales (increase the volume or the price)?”
Your inventory is your non-cash assets. No inventory, no cash and eventually no business. Start by generating best selling reports from the information in your POS system. From there, you will find out which products are your customers’ favourite.
This information can help you in deciding your stocks accordingly. How much stock of a certain product should you have in your warehouse (or in store), at one time? To answer this question, you will need to know your stock turnover rate. It basically indicates the length of time a product stays on your shelves or in your ware house.
3. Best Selling Report
This is important because not every product contributes equally to your sales. Using reports of sales by products and categories, you are able to see which best and least selling products and categories.
What is the combination of product sales that will help you to reach the desired profit margin?
With these information, you can figure out which categories generate the most for your store, and which ones are not living up to your expectations. You can then reduce the inventory in less popular categories and increase those in the popular ones. An action you can take to increase sales is to place your best selling merchandise at eye level and easy to see places.
4. Stock Turnover Rate
This refers to the speed of inventory movement. It is the number of times the average product in your store is sold in a year.
What does it mean to have a high (or low) stock turnover rate? Higher stock turnover indicates that you’re selling more without having too many products stocked. It is important to ensure a high stock turnover because when you have too much stock lying around, your cash flow is limited.
The high stock turnover rate could also mean that your store is not able to meet the sales demand. A low stock turnover rate may indicate poor inventory management. It may also indicate a slowdown in demand or overstocking in the product.
For products that have a low turnover rate, how much should you stock in order to keep sufficient cash flow in your account?
From your rate of stock turnover, here are some actions that you can take. You can decide to sell off unpopular items by giving major discounts as they are obviously taking a long time to get off the shelves. You can also negotiate return arrangements with suppliers and if the costs incurred in selling off these items are disproportionate, contact your supplier to know if you can return them.
5. Product Returns Rate
This is the percentage of products returned to your store over a given time period. In a retail setting, it is important to know the percentage of the products which are sold and returned to us. There is a fine line when dealing with returns policy. A simple and quick return policy may boost store sales as customers are more willing to try out new products.
However, when too many returns are made, your bottom line is affected. A high return rate could indicate problems with your product quality, marketing or even customer service. To reduce the likelihood of customers buying your product with lack of information, you can train your staff such that they only sell items that are suitable for each customer. Click here to learn more about product returns rate.
A friendly returns policy can be a boon or a bane. The key is to reduce numbers of returns without appearing to be overly defensive of faulty products.
Employees are your store ambassadors because they are the first point of contact for most of your customers. They will indirectly influence your revenue stream. In this case, you will want to use different measures to reward and retain your best employees, and provide necessary training for underperforming staff.
6. Hourly Sales Report
Having an Hourly Sales Report helps you to make staff-related decisions. Do keep in mind that the reasons for low hourly sales could be underperforming staff, insufficient staff, or just low traffic. Refer also to the employees performance report to further understand reasons for low hourly sales.
One actionable item for you right now is to find out your busiest hours. From there, you might want to adjust your staff levels accordingly (e.g. hiring more staff during busy hours).
7. Employee Performance Report
Find out who are your highest and lowest performing sales staff using Employees Performance Report. Your POS system might be able to generate this report for you. Using this metric, you can reward your sales staff with commission and provide necessary product and service training to staff who has the potential to perform better.
Each employee’s success at work determines the success of your business.