Key performance indicators (KPIs) are essential (and there are a lot of them) to continue evaluating your business’s performance. However, if you’re using KPIs wrong, they can hold your business back and make it more difficult to judge your company’s performance.
What are KPIs in Business?
KPIs are crucial for business owners because they:
- Are goal measurements
- Help you evaluate performance
- Offer real-time business evaluation
KPIs allow you to learn what’s working and what’s not working when you’re growing your business.
One mistake that businesses make is assuming that all KPIs apply to their business. However, there are a lot of classes of KPIs to consider, and a lot of work needs to be done to learn what KPIs are right and wrong for your business.
Before you even think about KPIs, you need to:
Understand Your Vision
You can’t know what KPIs are right for your business if you don’t determine your vision first. When figuring out your business’ vision, ask yourself the following questions:
- Where do you want the company to go?
- How much profit do you want to generate to live the life you want?
- How much do you want to work?
- What kind of business do you want to create?
Your vision is where you want your business to go. For example, you may never want to worry about capacity planning, so you’ll keep your business simple with just a handful of employees.
And there’s nothing wrong with this.
However, the goals of a business that wants to expand into a multinational organization will be much different from those that plan to remain small. When you understand your vision, it’s time to turn to your financials.
Ensure That You Have Good Financials
Consistent financial data is crucial if you want to reach your KPIs. For example, imagine placing your office supplies in one category this year and another next year. Starting with good financials allows you to have consistent data that can help you track your KPI success and failure.
Even if you’re doing your own bookkeeping, you should consider having a professional review them for you.
If your finances are inaccurate, your reviews and reports are inaccurate. Your business may be doing better or worse than you assumed if your financials are off.
Finally, once you have your financials in order, you can determine what KPIs you need and which don’t apply to your business.
Classes of KPIs to Consider
KPIs are not one-size-fits-all, so yours may be very different from another business. However, a good place to start is to have:
- 5 – 8 KPIs as a small business
- 5 – 8 KPIs for each department in an enterprise
You’ll find a long list of potential KPIs online, but we like to look at different classes to come up with KPIs. For example:
Your forward-looking KPIs, or leading KPIs, are those that you set for the following:
- Marketing and sales
- Lead generation
- Outbound marketing
- Inbound marketing
- Calls/appointments scheduled
- Close rate
KPIs are essential for all of these elements because they help you understand where your leads are coming from and how they’re converting. For example, you may reach your lead generation goals, but how many of these leads were quality leads? How schedule appointments or make calls to your business?
What is the close rate for these leads?
You can break this down further, too. For example, let’s assume that you’re using inbound marketing and online marketing to generate leads. Google Analytics can help you track how your lead generation and campaigns are going.
KPIs can be set to generate 100 leads a month and to close 15% of leads.
Of course, these are just example figures and will need to be adjusted to your business. When you set KPIs, you can then dig into and ask why you are or you are not reaching your goals.
If you’re setting marketing goals, remember that 95% of marketers agree that your marketing KPIs must be aligned with your greater business goals. Your goals need to work in conjunction with your KPIs to see results.
Historical or Lagging KPIs
Businesses rely on historical or lagging KPIs to compare progress over time. A few of the KPIs that may be included here are:
- Gross margins
- Gross margins by product/service
- Gross margins by entity
- Cash flow
It’s crucial to differentiate a product and service business, or to separate the two, when determining your historical KPIs. When you can look at the two separately, it’s easier to pinpoint what’s going right and wrong for each sector.
For example, since 82% of small businesses fail due to cash flow issues, you can’t afford to overlook the importance of cash flow KPIs. However, it’s easy to overlook that a service business may not have a cost of goods, but they do have a cost of service, which will impact cash flow.
Historical KPIs also provide insight into what’s impacting cash flow, what profit margins you’re maintaining and so much more.
Accurate financial statements are crucial if you want to track historical KPIs and compare your success. If your financials are inaccurate, there’s no viable way to track and compare KPIs.
Review and Adjust Your KPIs Periodically
Since your business is unique, the exact time to review your KPIs and potentially adjust them can differ. However, you’ll want to consider reviewing your KPI progress:
When you review your KPIs, you can adjust your approach to reach them if you fall off track.
If your goals change, and they will from time to time, you must take the time to review your KPIs. Your KPIs might remain the same, or you may need to change them to align with your new goals.
One last thing to remember is that trends can and will impact your KPIs. You must take the time to recognize trends in:
Seasonal trends or cycles may help you reach KPIs one season and miss them the next.
KPIs are an integral way for businesses to manage their operations and reach their goals. If you follow the tips above, you’ll be well on your way to setting and monitoring your progress to reach your KPIs.
Periodically, review your KPIs and adjust them as necessary.
If you need help getting your finances in order and determining KPIs that are best suited for your business, we can help.