Tracking Success: KPIs Every Business Needs to Save Money
Staying informed on your company's performance allows you to make educated decisions and identify exact points of weakness. Companies are constantly seeking ways to reduce expenses without sacrificing quality or growth. That’s where simple tools like Key Performance Indicators (KPIs) come in to help gauge how well your company is doing in different areas.
While there are many KPI’s to consider, here are ten that we specifically recommend for the goal of cutting costs and maximizing profits.
1. Operating Expense Ratio (OER)
This ratio measures how a company’s expenses compare to its revenue following a simple equation:
OER = Operating Expenses ÷ Total Revenue × 100
Your OER tells you what percent of your revenue is allocated to day-to-day operational expenses like rent, utilities, salaries, and administrative costs. The lower your OER, the greater your operational efficiency, leaving room for a larger profit margin.
The ideal OER changes from industry to industry, typically falling somewhere between 40% and 80%. The goal is to achieve the lowest possible OER without compromising essential expenses.
2. Cost Per Lead (CPL)
This metric measures how much you spend towards each potential client, known in the marketing world as a “lead”
Cost per Lead = Total Marketing Spend ÷ Number of Leads Generated
A lower CPL means you are bringing in leads more efficiently. For example, if you spend $5,000 on a campaign and get 250 leads, your CPL is $20. That means every potential customer costs you $20 to attract.
Monitoring this KPI can show you what marketing campaigns are worth your time and which ones you should cut out to avoid wasting money. Focus your marketing budget on the strategies with the lowest CPLs.
3. Customer Acquisition Cost (CAC)
Your CAC is similar to the CPL, but this time it measures how much money was spent per customer you earned, rather than leads.
CAC = Total Sales & Marketing Costs ÷ Number of New Customers Acquired
This KPI measures the total cost of acquiring a new customer, including marketing, sales, and promotional expenses. A high CAC might indicate the need to find more cost-efficient ways to gain customers. The goal is to maintain a CAC that is lower than the customer’s lifetime value, ensuring profitability.
4. Revenue Per Employee
This KPI measures how much revenue your company generates per employee on average.
Revenue per Employee = Total Revenue ÷ Number of Employees
This can reflect on individual performance and the strengths and weaknesses of your technology and business model. A low ratio means that you should consider looking into cutting down employees and finding better sales strategies.
Usually, this number is compared to the industry benchmark to see how well a company is performing.
5. Budget Variance
This number shows how far off your actual spending was from your planned budget
Budget Variance = Actual Amount − Budgeted Amount
A positive variance is good, that means you ended up with more profit than you budgeted for, and you can adjust your budget appropriately. In contrast, a negative variance means you spent more than you planned to and underperformed.
Tracking this number helps you stay financially disciplined and evaluate how effective your budgeting is. If you have a negative variance, you should find the areas that are overspending and correct the issue as soon as possible.
6. Inventory Turnover Ratio
The Inventory Turnover ratio shows how quickly inventory is sold and restocked. This does not apply to service-based companies.
Inventory Turnover Ratio = Cost of Goods Sold (COGS) ÷ Average Inventory
Measuring how quickly products move through the business can optimize inventory levels, reduce carrying costs, and improve cash flow. A lower ratio can indicate overstocking or declining sales, helping you gauge your company's performance more accurately.
7. Accounts Payable Turnover
The turnover ratio measures how fast you are paying off your suppliers.
Accounts Payable Turnover = Total Purchases ÷ Average Accounts Payable
A higher turnover ratio means the company pays its suppliers more frequently, which can strengthen supplier relationships but might reduce cash on hand. A lower ratio suggests slower payments, which could indicate cash flow issues or extended credit terms with suppliers.
8. Return on Investment (ROI)
This metric measures the profitability of an investment relative to its cost.
ROI = Net Profit ÷ Cost of Investment ×100
A High ROI means the investment generated good returns and profited the business overall. This number can help you determine where your resources would be best spent and how to get the highest returns.
9. Employee Turnover Rate
This KPI measures the stability of your workforce, telling you how many of your employees left the company during a specific period.
Employee Turnover Rate = Number of Employees Who Left During Period ÷ Average Number of Employees During Period ×100
If you have a high turnover rate, you may have issues with employee satisfaction, poor management, or maybe you aren’t up to par with other companies in your industry. If you experience issues with employee retention, it might be worth investing money into management, which saves money on new hires and training in the long run.
Conclusion
Tracking cost-saving KPIs isn’t just about cutting expenses, it’s about gaining clarity and control over your financial health. By focusing on the right metrics, you can uncover hidden inefficiencies and make strategic decisions that strengthen your bottom line.
Implementing these KPIs empowers your business to operate leaner and more profitably, setting the stage for long-term growth and success.
West To East Business Solutions is here to help you start cutting unnecessary costs. Our accountants will help you measure your KPIs and find solutions to optimize every area of your company for the highest financial reward.
Start turning your data into dollars by scheduling a free consultation with our CFOs and accountants.