Johannesburg – Starting an entrepreneurial venture is no easy feat. Foremost on the mind of most entrepreneurs is the “What if?” factor. Would-be entrepreneurs grapple with questions like, “What if things don’t work according to plan?” and “How will I know if I’m moving in the right direction?”
According to the University of the Western Cape, South Africa has a higher start-up failure rate – 70-80% of small businesses fail in the first five years – than elsewhere.
New small and medium enterprises (SMEs) are an essential vehicle to address the challenges of unemployment, economic growth, and perhaps most importantly, equitable distribution of income among South African citizens from all walks of life.
The high failure rate of SMEs can be attributed to several factors. Load shedding, high interest rates, and the rising cost of fuel exert a significant amount of pressure on small businesses.
How does one measure business success? According to Nkululeko Nombika, business operations director at Sage Africa, Middle East and Australia-Pacific, the answer may differ depending on where your business is in its life cycle or which industry you operate in.
For start-ups, revenue growth is key, while a more established business may focus more on profitability.
Nombika points to five KPIs every small business should measure.
1. Sales revenue
Revenue is an important measure of success because it reflects the demand for your products or services. The money generated from all customer purchases is called sales revenue. Returns or undelivered services are subtracted from this income to get the final sales revenue result. Other vital revenue KPIs are:
Revenue per employee, allows you to quantify the productivity and value of an employee.
Revenue growth rate shows you how sales are growing or declining over some time like over a month, quarter or a year.
2. Net profit and net profit margin
Net profit, also known as the bottom line or net income, remains after deducting all expenses from sales revenue. Your net profit margin is an essential indicator of the financial health of your business. The percentage of net profit created by your company’s revenue is your net profit margin.
If you notice that your margins are small or have not improved over time, you may need to boost your prices or rethink how you promote your product or service to grow appropriately.
3. Gross profit and gross margin
Gross profit reflects the direct costs involved in making a sale, such as materials, direct labour needed to fulfil a service or make a product, commission for salespeople, and shipping. It excludes fixed costs like back-office employees and rent.
Gross profit margin is a metric that indicates how well a product or a group of items performs in your business. You can fix any potential weakness in your business before it becomes an issue, by keeping an eye on your gross profit margin.
4. Cash flow
Making sales and achieving your margins are important, but they’re not enough. You also ought to ensure that you have a healthy cash flow. Cash flow is money flowing in and out of your bank account – the income you are receiving via customer payments, interest, and other sources versus the money you spend on business expenses.
It is one of the most important measures of a business’s health since a business can record significant sales, yet run out of cash because it needs to pay expenses before its customers pay up.
Using your accounting software for cash-flow forecasting can help you understand the flow of money in and out of your business, so you can plan accordingly.
5. Customer acquisition cost
Many companies are so focused on closing a sale that they forget how much money was spent to acquire the customer in the first place. Customer acquisition cost is calculated by dividing all expenses spent on acquiring a new customer by the number of customers acquired in a specific time frame. Keeping a low customer acquisition cost is crucial to scaling your business.
By constantly evaluating the KPIs that are tied to your business’s goals, you can ensure your company is always growing. You will also be able to identify issues and correct them before they have a negative impact. By automating repetitive, low-value activities and leveraging software solutions to get real-time visibility into your operations, you will be able to track your KPIs effectively.
Today’s cloud-native financial solutions offer powerful analytic capabilities that give you access to business insights to support better decision-making, and helping you grow your business, said Nombika.