Improving your bottom line is one of the most important objectives as a small business owner. To most effectively drive customers and generate revenue for your startup, it is important to use key performance indicators to effectively track your company’s growth.
What Are KPIs?
Key performance indicators, also known as KPIs, are measurable values that demonstrate how effectively your company is achieving its business objectives. The most important, but often ignored, facets of KPIs are that they are a medium of communication.
As such, they follow the three most important rules of effective communication:
This type of information is more apt to be absorbed and put into action.
When deciding what KPIs to employ within your business, start by researching common KPIs used within your industry. Next, clearly lay out your organizational goals, your plan for achieving them, and how you can utilize the information from your KPIs. Remember, KPIs need to match your startup’s strategy and objectives, not just your industry’s.
Benefits of a Performance Dashboard
The most effective KPIs follow SMART criteria, meaning they are specific, measurable, attainable, relevant, and timely. A performance dashboard can help you seamlessly track these goals by providing an easy-to-use platform to effectively measure your company’s performance while generating consistent improvement feedback within your company. An effective performance dashboard performs three main functions:
- Monitors significant activities and processes within your company using business performance metrics and online accounting systems to trigger alerts when potential problems surface.
- Analyzes the root causes of problems by investigating timely and relevant data from various perspectives at multiple levels of detail.
- Manages processes and people to enhance performance, optimize decisions, and point your startup in the right direction.
What Makes a Good KPI?
All KPIs should have an intended purpose that can be quantified. Even if the underlying achievement isn’t specific, the metrics that measure the initiative should be. For example, a company can strive to increase liquidity.
By itself, this goal can’t be measured. However, a company can incorporate liquidity ratios such as the quick ratio. By integrating this ratio into the KPI report, a company can measure its progress toward achieving a higher level of liquidity through the calculation delivered in the KPI statistic.
All KPI metrics should also be linked to something that can be done. Reporting a KPI is only half the battle; it is the responsibility of management to observe the results, translate what the calculation means, and deliver action to make changes.
For example, a goal of making customers happy does not have any associated actions. Instead, a goal of increasing customer satisfaction by increasing communication, decreasing wait times, and improving product quality is actionable. In addition, all three goals can be measured by KPIs.
Your KPI reports should create a historical timeline of what your company has been doing and the direction it is going. Referring to previous KPI reports is a great way to learn how your company has improved over time.
In addition, you can check back on how goals have been achieved, the timeline in achieving those goals, and what initiatives didn’t quite work as expected. Following up on documented KPIs allows management to learn from previous goals and incorporate the successful concepts into future KPIs.
All KPIs should come with an established life. Goals should have a specified timeframe, and the KPIs reporting on these goals should align with the plan. If the goal is to grow your customer base by 30% by the end of the year, your metrics should incorporate the progress of the goal not only by percentage but also by date.
Having achieved 20% growth is great, but if this metric is suddenly reported on the last day of the year, there is no time left to improve the metric. Therefore, integrate the number of days left with the target metric.
Businesses need to adapt to changing market conditions, so KPIs should never be fixed. Although it can be useful to report core financial information on a repetitive basis, it is also important to incorporate flexibility with reporting.
Change the way the KPI is presented, or change what the KPI is tracking without changing the underlying goal. In addition, follow what is applicable to your business, and be prepared to change the goal based on what is going on in the company.
There are two main groups of KPIs: process indicators and results indicators.
Process indicators are known as non-financial KPIs and originate from information separate from your accounting statements, such as your customer relationship management system and website.
Popular process indicators include:
- Funnel Drop-Off Rate: Calculates the number of visitors who quit a conversion process, known as a sales funnel, before completion.
- Customer Support Tickets: Determines the amount of resolved tickets versus the amount of new tickets and the time in which a resolution is reached.
- Percentage of Product Defects: Analyzes the number of defective units divided by the total amount of parts created within the timeframe of examination.
Contrary to process indicators, results indicators measure how well your business is performing financially. However, process and results indicators are not mutually exclusive, as more efficient processes usually produce better results.
Popular results indicators include:
- Gross Profit Margin as a Percentage of Sales: Quantifies the amount of money retained versus the amount being paid to suppliers.
- Revenue Growth Rate: Measures whether your startup’s growth is plateauing, increasing, or decreasing.
- Incremental Sales: Calculates the effectiveness of your marketing campaigns at generating increased sales and revenue.