Whether it is having a monopoly in the local market or setting up an office in every city, every business has a goal that it is striving towards. However, such goals can’t be achieved in a day. It takes years of hard work and strategizing to realize them. So, how do you know if your business is really headed in the right direction? Key Performance Indicators (KPI) help track progress toward your goal and gauge how far you are from it. KPIs are measurable, quantifiable values that help a business gauge how effectively it is working toward achieving its goals. KPIs can help companies to answer the question: Are you working hard enough, fast enough, and smart enough to fulfill your business goals?
How Do KPIs Help Your Business?
Just working hard to sell a product or service without any performance metrics is like driving in a blind spot. KPIs help you assess whether you are moving toward your goals while highlighting weaknesses and areas for improvement in your strategy. For instance, startups spend a significant amount of money on customer acquisition. By calculating lead conversion rates across different sales channels, you can identify the most effective and eliminate the least effective.
Tracking your KPIs can help you review, adjust, and evolve your business plans until your efforts start to show the desired outcome. Such clear indicators also help your employees align their individual tasks with a common goal: the company’s overall progress.
How to Create KPIs For Your Business
KPIs should be aligned with your business goal. They should be SMART – Specific, Measurable, Attainable, Relevant, and Time-bound. Fulfilling a goal 10 years too late, or aiming for one with no real-world applications, would be useless. Hence, it is necessary to set KPIs focused on a single goal, with a specific purpose and duration.
For instance, if your business goal is to increase your sales by 10% in the next six months, you could break down the goal for each department – sales, marketing, product – and set KPIs that lead to sales growth. The product team could design a new product with fewer complaints and higher customer appreciation. The marketing team could run a campaign to increase foot traffic at physical stores, online store visits, app downloads, or inquiries. And the sales team could have a KPI of lead conversion rate.
By tracking your KPIs every month, you can identify any loopholes or gaps in your marketing strategy or pricing to make your product more attractive and drive sales.
Types of KPIs
The KPIs are unique to the industry, business goal, and strategy. Each business has one common goal: to make a profit. However, the ways to earn profit vary by company, and no one better understands the business’s desired outcome than you, the business owner. You can begin with commonly used KPIs and gradually build more specific ones as you get the hang of them.
Common KPIs used by almost all profit-making businesses are gross profit margin, net profit margin, operating cash flow, and customer acquisition cost (CAC). However, these are broad KPIs for financial management.
Industry-specific KPIs help achieve common Key Performance Indicators. For instance, restaurants monitor the food cost percentage and table turnover rate to track costs and revenue. Retailers monitor inventory turnover and sales per square foot to determine if the physical store is generating sufficient money to make economic sense. Professionals use the utilization rate to bill for staff, and nonprofits use the program expense ratio and fundraising efficiency.
While the above are operational and financial KPIs, there can be some strategic Key Performance Indicators to support high-level decision-making. For instance, production lead time is the time from purchasing raw materials to delivering finished goods. It can help you set terms with suppliers, have sufficient working capital, and keep warehouses available to manage that inventory.
While all these KPIs sure look insightful, they may not all be necessary for your business. Most businesses make the mistake of cluttering the dashboard with too many KPIs. Cluttered KPI reports could waste employees’ time and divert them from the goal.
Test The KPI to See If It Gives the Desired Outcome
To declutter KPIs, you need to test which KPIs to introduce and which to let go. To track KPI, you first need to collect the data. Either the existing systems and databases may be automatically collecting that data, or you may need to set up a process to record and report it.
Once you have the raw data, you can devise formulas to arrive at the metrics. You can back-test the KPI and see if the KPIs derived from past data could have helped you make better decisions. Once you shortlist the most relevant KPIs, you can build a dashboard and automate the process to collate and present them in a format that’s easy to distribute.
Track the Goals with KPIs
Once you have the systems in place, it is time to monitor the KPIs and track the progress towards your goal. The goals can be at the program level, company-wide, or department-wise. Each department can have a goal linked to the end goal. Whether you monitor the KPI daily, weekly, or monthly depends on the nature of your operation. For instance, a car manufacturer may track production lead time with every production batch. However, a ride-sharing service might want to track the number of rides completed daily.
Remember, KPIs should be shared with the teams as they are the ones who have to achieve them. When setting these KPIs, consider discussing them with departments to ensure they are practical. Having over-the-moon KPIs like a 40% lead conversion or 0% attrition is impossible to achieve.
KPIs, when used effectively, enhance engagement and accountability across the company. Each team member knows how they are contributing to the business goal and can be incentivized based on KPI data.
How to Effectively Use KPIs
Tracking KPIs is administrative, but making decisions based on them is strategic. You should be able to gauge the KPI’s effectiveness and its role in making informed decisions. For instance, a non-profit organization might want to know which program is more impactful and channelize resources there. That would require studying the program-level KPI.
Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You Improve Business Performance
You could consider hiring a fractional chief financial officer who integrates finance, business, and strategy to help you crunch the numbers and identify your KPIs based on the nature and goals of your business. At Edelkoort Smethurst CPAs LLP, our business consultants and CFOs can provide services such as identifying KPIs, tracking, and automating the process. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best CFO services, contact us online or by telephone at XXX-XXX-XXXX.