Common KPIs (key performance indicators) are whatever numbers you determine are critical to your business’s success. They can vary depending on your industry and how you run your business. An online marketing company isn’t going to have the same KPIs as an automobile manufacturer.
Choosing the right KPIs can be tricky. Start by looking at your financials. Are there any numbers that jump out at you as being way too high or low? If so, you’ll want to keep an eye on those.
Do you notice any trends when comparing the same numbers over different time periods? This is something else you’ll want to keep an eye on so you can identify the reasons for those trends.
Here are some common KPIs as well as how you can monitor them in Xero.
Business revenue (or gross sales) is a commonly tracked performance indicator, but it doesn’t tell you much on it’s own. Here, you’ll want to look for trends by comparing your revenue across different time periods. How do your sales look compared to the same time period last year? What about last month? Are your sales increasing or decreasing?
Gross profit is revenue less the costs associated with making and selling products (cost of goods sold). If you have a product-based business, tracking gross profit lets you know how much profit is available for other costs after deducting your product costs.
An increasing or decreasing can tell you if you’re selling your products at the right price. If the costs to sell your products increased, but you forgot to increase your selling price, you’ll see your gross profit decrease.
Net income is your revenue minus all your expenses. This is a helpful KPI to track because it is often the starting point for calculating taxable income. There are a number of adjustments required to calculate taxable income, but if your net income is showing an increasing trend, this could be a good indicator that your taxable income will also increase. If your taxable income increases, that means you’ll be required to pay more tax.
Your bottom line, as net income is often referred to, can tell you how profitable your company is.
If you’ve ever wondered if a job or client was worth it, now you can know for sure. Job profitability is monitored by assigning costs to a specific job. Tracking job profitability can show you which jobs are the most profitable which can be helpful if you’re in the position of not being able to accept all the work that comes your way.
Job profitability can also tell you if you are charging enough based on the costs for the type of work you are doing. If you notice one job was more profitable than another, you can investigate why and apply what you learn to future jobs, potentially increasing their profitability. However, if you hadn’t tracked job costs, you never would have noticed this.
Client retention is an important way to ensure repeat business, and repeat business is the foundation of any successful business. By monitoring client retention, you can easily see who are your best clients and tailor your marketing to reflect that. Word of mouth is powerful when it comes to growing your business.
Repeat customers are satisfied customers who would be likely to give you a referral to help you grow your business. Client retention helps guarantee your business will see long term success.
How to Monitor Common KPIs in Xero
The Xero Account Watchlist
The Xero Account Watchlist is a simple way to track individual accounts. It works great for something like sales, but not for net income. To add an account to the Xero Account Watchlist, go to the account in your chart of accounts and check the box that says, “Show on dashboard watchlist.”
After you’ve done this, when you return to your dashboard you’ll see your account watch list displays the monthly and year-to-date numbers for the accounts you’ve selected.
Profit & Loss Statement
The easiest way to track gross profit, net income, and job profitability is with your profit and loss (P&L) statement. To access your P&L statement, go to the accounting tab. If you view the current financial year, Xero automatically breaks this down by month, making it easy for you to identify trends.
For job profitability, you can filter your P&L based on the tracking categories you’ve set up. To set up tracking categories, go to the accounting menu then select “advanced” and “tracking categories.”
To monitor client retention, you can use the contacts tab to add your client list to Xero. Xero also has a feature in the contact section that allows you to import a client list if you’ve already started a list somewhere else. It’s also possible to add contacts one at a time.
As long as each invoice you send includes client contact details, you can run all sorts of reports showing you your most profitable clients as well as which clients purchase most frequently from you. The most profitable clients and the clients with the most purchases aren’t always the same people, and this can tell you a lot about your business as well.
You can turn any metric into a KPI, it really depends what you think are the most important numbers for you to watch in your business. For example, if you do a lot of advertising to bring new customers in, the cost of customer acquisition might be an important KPI for you.
If you’re not sure which KPIs you should be monitoring, or if you’d like help setting up a KPI monitoring system in Xero, get in touch. We’re happy to help! The more you understand your business, the better equipped you are to take it in the direction you want to go.