What does KPI mean?
Keep profits improving?
Knowledgeable product influencers?
Those are good guesses, but they don’t quite hit the mark.
The correct answer: KPI is an acronym for ‘key performance indicator’. But what are key performance indicators really?
Get the answer to that question and many others, including ‘What are the top financial KPIs,’ ‘Why are key performance indicators important’, and ‘How do I track financial indicators’ - in this full breakdown of ecommerce KPIs.
What Is A Financial KPI?
A financial KPI is a key performance indicator (also known as a key financial indicator) used to quantifiably measure and assess how efficient and effective a business’s economic behavior is over a given period.
Naturally, KPIs are used to track how a business is doing compared to other businesses in the industry. Moreover, financial key performance indicators are also used to help businesses set specific goals relative to how those KPIs have trended in the past and where the business owners want those KPIs to stand after some time.
We’ll cover all of the top financial KPIs that your business should track a little later, but for now, it should suffice to point out that the typical handful of key financial indicators that businesses tend to track (and that you may be familiar with already) include net profit margin, cost of goods sold, growth in revenue, and operational cash flow. Again, we’ll discuss those financial reporting KPIs and many more in detail in just a bit.
As you may well imagine, keeping accurate measurements of all your business’s KPIs can be time-consuming and complicated if you try doing it all on your own. For that reason, business owners often use a professionally developed app or tool to measure their KPI financial metrics. Whether you learn to run those calculations yourself and do so on a regular basis - or use a reporting tool to do it for you - getting precise measurements of your business’s financial indicators is a necessary step.
The best way to measure KPIs for a Shopify business is to use the BeProfit Profit Tracker app. You can toss out the spreadsheets and automate the KPI tracking process with this powerful Shopify calculator app. Get all of your key financial indicators in one place, with a quick onboarding process, and an all-star support team to help you any time.
Try BeProfit with a 14-day free trial and start optimizing your financial KPIs.
Why Are Key Performance Indicators Important?
Measuring and tracking key performance indicators is important for various reasons. As we mentioned above, analyzing financial indicators is an important part of knowing how your business compares to your competitors as well as setting realistically achievable goals.
For example, if you’re selling refurbished electronics through an online store, you almost certainly know you face a lot of strong competition. To claim your slice of the pie, you should keep tabs on your business’s top financial KPIs and then compare them to your competitors. The perspective and insights you gain can help you steal some of the business away from the other companies operating in your niche.
On the other hand, let’s say you’re selling clothes and accessories through e-retail and you want to make changes that will help increase your store’s profitability. First of all, you’d need to measure your current gross and net profit margins. Then you’d want to look back at how your profit margins have grown and shifted in the past and try to identify spikes that correlate with (for example) changes you made in your marketing efforts.
Knowing where your margins were before and where they are now can help you set a reachable goal for improving your business’s profitability. Of course, you should then continue tracking those KPIs in order to know where you stand in relation to your goals as time goes on. Otherwise, how could you tell if you reached your target or not?
While those two examples of why key performance indicators are important were focused on a more macro-view of your business, KPIs can also be used to measure performance on the micro-level. What we mean is you can also use financial indicators on a more frequent basis (weekly or even daily) to discover if there are certain days of the week when sales are higher, whether a holiday made a big impact on your revenues or not, and so on.
Financial KPIs for small businesses can be used in as many ways as your imagination can come up with, but the ultimate goal of using KPIs is always the same: to make your business better. To that end, you may prefer to focus on certain financial reporting KPIs more than others in order to reach whatever goal you have. Check out the list below to get familiarized with the different KPI financial metrics to choose from.
Top Financial KPIs
1. Gross Profit Margin
2. Net Profit Margin
3. Debt to Equity Ratio
4. Working Capital
5. Operating Cash Flow
6. Return on Equity
7. Cost of Goods Sold (COGS)
8. Day Sales Outstanding
9. Sales Growth
10. Repeat Purchase Rate
11. Average Order Value
12. Customer Lifetime Value
1. Gross Profit Margin
Definition: Gross profit margin measures how effective your business is at handling the direct costs of sales. This is the simplest profit margin formula, as it takes into account only the net sales and the cost of goods sold (COGS).
How To Calculate:
Example: ($10,000 - $2,600) / $10,000 x 100 = 74%
2. Net Profit Margin
Definition: Net profit margin measures how effective your business is at handling all expenses including direct costs (COGS), indirect costs (research, marketing, etc.), as well as taxes and interest. This is also the best KPI to use in order to determine how well your business is handling interest payments and taxes in relation to revenue.
How To Calculate:
Example: ($10,000 - $2,600 - $3,200 - $500 - $360) / $10,000 x 100 = 33.4%
3. Debt To Equity Ratio
Definition: Your business’s debt-to-equity ratio measures how much debt you’re taking on in order to leverage your assets. It essentially evaluates the degree to which your business is operating on debt versus (you guessed it) equity. Since this ratio compares liabilities with the total value of shareholder equity, this is commonly used as a corporate finance KPI. Generally speaking, you want to keep this financial KPI measurement lower - though, on the other hand, debt can be used as a tool to grow your business as well.
How To Calculate:
Example: $7,200 / $4,500 = 1.6
4. Working Capital
Definition: Your business’s working capital is the difference between current assets and current liabilities. Practically speaking, it’s the minimum amount of capital needed to maintain a cash flow; enough money to purchase materials, produce inventory, turn that inventory into profits, use those profits to purchase more materials, and so on.
How To Calculate:
Example: $25,000 - $7,200 = $17,800
5. Operating Cash Flow
Definition: Operating cash flow represents the amount of cash your business generates as a result of its ‘regular’ business operations. Rudimentary as it may be, calculating operating cash flow serves as a baseline method for determining your business’s overall financial health & stability.
How To Calculate:
Example: $10,000 - $3,200 = $6,800
6. Return On Equity
Definition: Return on equity also falls under the category of ‘corporate finance KPI’, since it compares your business’s net income to its shareholder equity. In the most basic sense, return on equity is a measure of how efficiently your business is using the capital invested by its shareholders. High ROE can mean a few things: maybe your business really is earning a large net income, or maybe your business has a very small amount of equity.
How To Calculate:
Example: $3,340 / $4,500 = 0.74
7. Cost Of Goods Sold (COGS)
Definition: Cost of goods sold (COGS) are the direct costs incurred by a business to sell its products. Those costs include the price of the item itself along with every production, material, and labor expense associated with said product. It’s important to note that COGS do not include indirect costs such as marketing, overhead, and other operating expenses.
How To Calculate:
Example: $12,000 + $7,000 - $3,000 = $16,000
8. Day Sales Outstanding
Definition: Day sales outstanding is a financial key performance indicator that has two definitions - DSO either represents the amount of time it takes for your business to collect account receivables, or it refers to how long it takes your company to see sales made with credit show up as cash in your account. A low DSO is preferable, though it can also mean that you have strict payment terms, which some customers may not find favorable. One important note is that the values entered into the DSO formula must all come from the same period of time.
How To Calculate:
Example: ($120,000 / 720,000) x 365 = 61 days
9. Sales Growth
Definition: One of the most basic and at the same time most important KPI financial metrics is sales growth. The measurement is pretty self-explanatory. It’s the rate at which the number of sales your business generates increases (or decreases) as time goes on. A low sales growth rate means you need to reevaluate your e-commerce store’s funnel or the approach that your sales team uses. Conversely, a high sales growth rate is usually great news for a business and means that customers love you and your products.
How To Calculate:
Example: ($38,000 - $34,800) / $34,800 x 100 = 9.2%
10. Repeat Purchase Rate
Definition: Repeat purchase rate is an ecommerce KPI that calculates how many customers have made more than one purchase from your online store – typically as a percent value. This is a key metric to keep track of, specifically because an increase in RPR can translate into better profit margins. A mere 5% increase in retention can mean up to 95% growth in profits. As is normally the case, the values entered into the RPR formula must all come from the same timeframe.
How To Calculate:
Example: 116 / 846 = 13.7%
11. Average Order Value
Definition: The average order value of your business is a benchmark for the average amount of money (dollar value) that a customer can be expected to spend any time they place an order through your online store. This is one of the first financial indicators that you’ll want to calculate, as it plays into other important metric calculations such as customer lifetime value (see below).
How To Calculate:
Example: $137,000 / 846 = $162.13
12. Customer Lifetime Value
Definition: Customer lifetime value (CLV for short) is a metric that aims to define how much money the average customer can be expected to spend at your business from the time of their first purchase until their last purchase. There are a number of different formulas you can use to calculate CLV - below is what we find to be the most useful (aside from the easy CLV calculation that can be done through the BeProfit Shopify app).
How To Calculate:
Example: $162.13 x 3 x (1 / 0.06) = $8,106.50
Your Data Matters
Keep profits on the rise by tracking your KPIs! Don’t rely on plain luck or intuition - ensure your business’s success by staying updated on all of your business’s key financial performance indicators. That’s why they exist, after all.
It may take time to get a firm grasp on each of the ecommerce financial metrics covered here, but trust us when we say they’re well worth learning about. You can even use KPIs to measure how your business improves as a result of learning about KPIs.
Don’t forget to bookmark this page and keep these top KPI definitions on hand for your future reference. Happy tracking!
About The Author
Benjamin Shabat
Benjamin is a content specialist at BeProfit , where he works to deliver useful and relevant information to small online business owners. BeProfit is dedicated to helping e-commerce stores grow by giving them true control over their business’s data.
Ricky Hayes
Trisha Ballesteros