Your car dashboard tells you how far you’ve driven and how much gas is left in the tank. Your smartphone has a button to tell you how much space you’ve got left after taking all those pictures of the kids. Your bank’s all too happy to show you a report on how your accounts are doing.
You need the same kind of statistical insights for your small business. They’re called “Key Performance Indicators” or KPIs. Metrics and KPIs use information you’ve measured and verified to tell you how you’re progressing toward goals.
It’s tough to know how you’re doing until you know what you’re doing, am I right? Here’s how to get started…
Getting Started with Metrics and KPIs in Your Business
“It’s not all about talent. It’s about dependability, consistency, and being able to improve.” – Bill Belichick
Basically, what you’re looking for are performance measures that you can quantify with a specific, clear value – a dollar figure, let’s say or an increase in sales over a certain time. This performance has to be part of your effort to eventually meet a specific goal.
Say you’ve decided your big goal is to double your profits in five years. First, you figure out what that number would be (your goal). Then you figure out what you and your people have to do to meet that goal and how to quantify with plain-as-day numbers your progress each step of the way (your KPIs).
Sounds easy enough – but as always in business the devil can run wild in the details. For instance, you have to understand the difference between your leading and lagging indicators.
I know, sounds fancy, but, simply put, the tasks you’ve done and the results you’ve achieved are the lagging indicators; leading indicators are the actions you’re taking to get to those results. Not easy-peasy but not rocket science, either.
Note: Lagging indicators are easy to measure but tough to change since you’ve done them already (the past is funny that way). Last quarter’s sales would be an example. Leading indicators are naturally tougher to measure but a lot easier to change; an example might be a service or product line that you haven’t brought out yet.
Make a plan, Stan.
Remember that goal you set? Look at it now and work backward, brick by brick. What actions are needed from you and your people to meet that goal one step at a time?
Let’s say you want a hundred bucks in income by the end of the next six months. What has to happen for you to hit that hundred?
Now let’s say the first step is hiring folks. Maybe you’ve figured out you’re going to have to hire two new people who will do the work to get you to that hundred. And you know that it’s going to take each of them two months after they learn the job to bring in that hundred in new clients or sales. But before that, it’s going to take them three months to get up to speed.
Let’s also say that your vast expertise in business has taught you that you have to interview about half a dozen people to find the right candidate and that it takes you two weeks to interview about six candidates.
In terms of metrics and KPIs, you need to:
– Place the ads now
– Have 12 people interviewed in the next month
– Train your two new people in the next three months
– Put them to work in the last two months making that hundred bucks
Get the idea? Add clear, objective numbers as targets for each step along the way, and you’re in business.
What could go wrong?
A lot. That’s why you have to make sure your staff is in the loop and knows the importance of metrics and KPIs. Otherwise, a lot of people can get the wrong idea and think this is a big waste of time.
– First, make sure everybody knows the difference between a KPI and a goal. Getting a new product out there by the end of summer or boosting employee productivity, for instance, are goals, not measurable KPIs.
– Boy, KPIs sound right for us – we want a million of ‘em… No, you don’t. Too many KPIs are impossible to track. Keep’em critical and make them easy to track.
– Make it clear to everybody why the metrics and KPIs exist, how they can participate and why the goals of the indicators are important to the whole company. One good way to do this is called a “Measure Gallery” – a big room with a lot of wall space where you post the progress of the KPIs and invite workers to come in at their leisure, take a gander, and chat. Maybe put out some pizza – that never hurts.
All of this said … these sort of things are our bread and butter when working with small businesses.
Can we help? Well, let us start by listing some different types of KPIs for you to use as a jumping-off point.
Common Financial KPIs
* Average transaction value.
* Gross profit margin.
* A measurement of a company’s efficiency during the production process.
* How much is left over after COGS.
* Gross Profit divided by Total Revenue.
* Net profit percentage.
* The amount of profit for every $1 of revenue generated.
* Net Profit divided by Total Revenue multiplied by 100.
* Debtor days or receivable turn days.
* How long your customers take to pay you. (The sooner your customers pay, the sooner you can get that cash working for you.)
* 365 (days in a year) divided by (Sales on credit or invoice divided by Average Accounts Receivable).
More industry-specific KPIs might include:
* Table turns per night – The number of times a restaurant is able to sit customers at a table.
* Utilization – The number of hours a machine in the production line can run.
* Rejection rate – The number of defects rejected in an assembly line.
Non-industry-specific KPIs might include:
* Customers won/lost.
* Customer complaints/product returns.
* Staff sick days.
This is by no means an exhaustive list. KPIs really are specific to your business and your goals for that business. But no matter what, you must integrate the RIGHT measurements to get the proper insight into your business’s performance. You don’t want that engine running too hot… (or too cold)
I hope this gets your juices flowing. Many of these financial indicators are things that WE can help you to implement… if you let us.
In your corner,
Masterpiece Accounting Services