I am a CPA who provides accounting services to ecommerce merchants. Many merchants often focus exclusively on sales, profits, and bank balances to determine if their business is successful. But, really, to gauge success, you have to dig deeper. It’s the “key performance indicators” that are important to monitor — financial and non-financial.
It’s the “key performance indicators” that are important to monitor — financial and non-financial.
Financial KPIs primarily come from your accounting system. Examples are your monthly sales, gross profit percentage, and inventory turnover. Your financial KPIs are only as good as the accuracy of your accounting system.
Non-financial KPIs primarily come from sources other than your accounting system. Examples are your conversion rate, website traffic, and email subscribers.
You don’t need to measure all the information. Instead, choose three to seven financial and non-financial KPIs. Measuring too many will lead to paralysis by analysis.
Your KPIs should be based on your goals. They should also have real meaning. If you have this information, how will you use it? If you won’t use it, don’t measure it.
For example, if you want to grow sales by 60 percent, measure your sales. If you are concerned about the cost of goods sold, measure the actual costs and gross profit percentage. If you want to grow website traffic, measure the weekly and monthly visits. If are concerned about operating expenses, measure them in dollars and as a percentage of sales. KPIs should drive your decisions and measure your company’s performance.
Numbers or Percentages?
Merchants sometimes ask if they should track numbers or percentages. The short answer is both.
When using financial KPIs, it’s usually better to use percentages. If the percentages have a big change from month to month, look at the actual numbers on the financial statement and in your accounting system.
If your historical gross profit is 55 percent of sales and in January 2015 your gross profit dropped to 51 percent, this could be a problem. To determine if this is a singular event or an ongoing problem, look at the detail in the accounting system. After investigating further, you might remember, for example, that in January you discounted some inventory. This reduced the sales price, resulting in lower gross profit margins. It is isolated to January since you stopped the discount on January 31.
Conversely, when using non-financial KPIs, you likely will use actual numbers, but there could be a need to use percentages. It all depends on what you want to measure.
Website traffic, for example, would be an actual number. But if you want to increase your conversion rate by 5 percent, measure that in a percentage.
Compare to Past Data
Measure your business’s KPIs against your own historical data and not industry averages.
Track your KPIs over time. I suggest 13 months. This will allow you to compare your current month (February 2015) to the same month last year (February 2014), plus the months in between.
Using 13 months serves multiple purposes.
- It’s long enough to see trends — hopefully, progress.
- It shows your recent history — improvements and declines.
- It’s not too far back, as your business is likely always evolving.
I’m not a fan of measuring a business on industry averages. You don’t want to be average. Your business is different. An industry average might suggest that you can improve in some areas. But you should always strive to improve your own performance, not an average.
While financial statements are important, they should not be the only information you rely on.
Determine your key performance indicators based on what you want to improve. Review these KPIs before looking at the financial statements. The KPIs should paint a picture of your business and, in return, will make the financial statements easier to understand.