Top Performing Companies Are Metric Driven
KPIs are indispensable to business success, regardless of company stage. These metrics provide milestones that gauge progress and create tangible targets for teams to work toward, leading to expanded insights that guide strategy, operations, and an organization’s success.
In this short guide, we’ll cover the basics you need to know about KPIs, including common formulas, the use cases, strategies for implementation success, and how to interpret your data.
This guide is designed to elevate insights into your business; however, KPIs aren’t a one-size-fits-all solution. For KPIs unique to your business, you’ll want to consider a variety of factors, including the type of business you’re operating, your near-term goals, your long term goals, and which types of data are accessible. We’re happy to connect to discuss this topic if you’d like to explore KPIs unique to your business.
What are Key Performance Indicators?
Key performance indicators, frequently referred to as KPIs, are a quantifiable measure of a company’s performance over a specific period of time. These measurements can contain both quantitative and qualitative data, and extend outside of monetary or financial ratios.
The goal of generating KPIs is to track your business’s progress towards strategic initiatives, whether those initiatives are related to customer retention, gross sales, team productivity, or any other measurement that offers insights into an agreed upon objective. The KPIs that your organization finds most useful will depend on your specific goals.
For example, a company focused on generating more sales from each customer would focus on tracking lifetime value and customer churn. However, a company looking to improve profitability would shift its attention to financial KPIs that track sales and cost of goods sold.
What are the Most Common KPIs?
There are dozens of KPIs, many of which might be useful to your goals. Let’s break down the common categories of KPIs and the type of measurements you may calculate:
Customer KPIs – These KPIs analyze your company’s relationship with customers, including customer retention, average customer service reply time, satisfaction rate, and lifetime value.
Operational KPIs – These metrics measure your productivity and employee satisfaction through ratios like employee turnover, open project percentages, shipping times, and more.
Financial KPIs – Financial KPIs include general ratios, such as working capital, days payables outstanding, and profit margin.
Marketing KPIs – Website traffic, clicks per customer, and call-to-action conversion rates are examples of marketing KPIs.
Sales KPIs – These KPIs evaluate your sales function, including lead-to-sale conversion rates, sales growth, recurring vs non-recurring revenue, and average order or contract value per customer.
The specifics of your industry and organization will dictate which categories of these KPIs you choose to implement.
How are Key Performance Indicators Used?
Key performance indicators are used for a variety of reasons. For one, they align your team with your business initiatives. The adage you can’t manage what you can’t measure speaks directly to the value of showing your team trends in important areas of the business. How can you expect to grow sales by 5% or reduce churn by 10% if your team has no tangible way to measure progress? KPIs are relatively simple calculations that your team can complete on a regular basis. But don’t be fooled by their simplicity. KPIs offer valuable visibility into progress against initiatives.
Additionally, KPIs are commonly used in the budgeting process since they evaluate your progress toward certain initiatives. Let’s say that you budgeted $500,000 in revenue for July. Your actual financial results only showed $450,000 in revenue. In order to determine what went wrong, you would use a variety of operational and financial KPIs to pinpoint areas needing improvement.
Maybe you found that your clicks per customer were down, so you add a new promotion, or your shipping times were delayed, so you rework your employee schedules to expedite processing. Knowing what contributed to the lack of sales growth is essential to reach your budgetary goals in the next period.
KPIs are also useful when conducting a business sale process. Before a deal can be closed, buyers will work to fully understand your operations. This process is far more efficient for buyers and sellers when KPIs can be provided to offer analytical insights into key areas such as product economics, historical growth, headcount changes over time, customer acquisition cost, profit margins, and customer concentration. Setting an objective to improve KPIs can put a business on a path to higher growth, more profit, and a successful exit.
Implementing KPIs in Your Organization
Implementing KPIs in your organization isn’t a difficult process, but it does take dedication and clear communication with your team. Here is a five-step process to get you started:
Gather Data – What data are you already collecting? How does this data translate into measurable KPIs? Be certain to record your data collection practices so that you create consistency across months/quarters/etc.
Align KPIs with Projects – What are your goals? Understanding your goals or specific action items allows you to pinpoint which KPIs are most useful.
Discuss Goals with Your Team – Everyone on your team needs to be on the same page. Consider holding a meeting or sending out a detailed email with your business objectives and how each individual will contribute.
Monitor Progress – This is arguably the most important step. Once your KPIs are defined, you need to monitor progress. Can you assign a team member to monitor KPIs? How often will you track progress?
Adjust Processes – After the first few months, you may notice that you aren’t making progress in your KPIs. Successful businesses remain agile and are willing to adjust processes to reach their goals.
This five-step process might look different for your business. If you are confused about where to start, reach out and we’ll be happy to discuss how you can implement KPIs.
How to Effectively Interpret KPIs
As a part of your monthly or quarterly budgeting processes, you should review the KPIs you established in step two of the implementation process. How is this done? There are a few different ways you can go about interpreting KPIs in your business.
For one, you should compare your actual results to budgeted results and historical information. If you notice poor performance, dig into the factors that are impacting the results. It’s not enough to say that performance was bad and hope for the best in the next reporting period. You need to understand what went wrong and implement actionable changes to generate stronger results going forward.
Another way to effectively interpret the KPIs in your business is to compare your results to industry benchmarks. For example, software businesses might not have high levels of fixed assets, which means investments in growth appear on the income statement and suppress operating profit. This can create the appearance of a low return on assets. Does this mean that your operations aren’t effective? Probably not if your results are similar to those of other software companies, and if your investment in growth is slated to produce a future cash benefit and therefore very attractive returns. Furthermore, this may beg the question of whether return on assets is the best metric for your business.
Getting Started
Whether you are preparing for an exit as a small business owner or trying to improve your current business practices, KPIs should be an integral component of your process. It can be hard to understand where to start when it comes to KPIs, but remember that the process of implementing KPIs does not have to be complex. What are you currently tracking monthly that you can use as a measurement of progress towards a key initiative? Start with a simple set of metrics, and expand your KPI list as you become comfortable with the routine of using data to measure and guide strategic and operating decisions. We’re confident your business will benefit.
